LIBRARY 

OF   THK 

UNIVERSITY  OF  CALIFORNIA, 


OIRT  OH 


Class 


m 


I 


m 


SINKING  FUNDS. 


A    DISSERTATION   PRESENTED    TO   THE   BOARD    OF    UNIVERSITY    STUDIES 

OF     THE     JOHNS     HOPKINS     UNIVERSITY     FOR     THE 

DEGREE   OF  DOCTOR   OF   PHILOSOPHY. 


BY 

EDWARD  ALSWORTH  ROSS, 

Associate  Professor  of  Political  Economy  and  Finance,  Cornell  University. 

BALTIMORE,  1892. 


Sinking;   Funds. 


SINKING  FUNDS. 


A    DISSERTATION   PRESENTED    TO   THE   BOARD    OF    UNIVERSITY   STUDIES   OF   THE 

JOHNS   HOPKINS   UNIVERSITY   FOR  THE   DEGREE   OF  DOCTOR   OF 

PHILOSOPHY. 


EDWARD   A.   EOSS,  Ph.  D., 

Associate  Professor  of  Political  Economy  and  Finance  in  Cornell  University. 


II  I .'    1 

'•  A 


COPYRIGHT,  1892,  BY  AMERICAN  ECONOMIC  ASSOCIATION. 


BALTIMORE: 

FROM  THE  PRESS  OF  GUGGENHEIMER,  WEIL,  &  Co. 
l&B. 


TABLE    OF  CONTENTS. 


PAGE. 

INTRODUCTION 7 

I.  ENGLISH  AMORTIZATION 9 

The  Wai  pole-Stanhope  Sinking  Fund 9 

The  Theories  of  Dr.  Price 12 

Pitt's  Sinking  Fund 14 

Decay  of  the  Old  System 16 

"The  Old  Sinking  Fund." 18 

"  The  New  Sinking  Fund." 19 

Terminable  Annuities 20 

II.  AMERICAN  AMORTIZATION 21 

Redemption  of  Paper  Money 21 

Loans 24 

Plan  of  Robert  Morris 25 

Efforts  to  Provide  for  the  Debt 26 

Foreign  Loans 29 

Summary 30 

The  New  Government 30 

The  Report  on  the  Public  Credit 31 

The  Funding  Act 34 

The  Sinking  Fund  of  1790 36 

Early  Operations  on  the  Debt 37 

Changes  Made  by  the  Law  of  1792 41 

Complications 44 

The  Sinking  Fund  of  1795 48 

The  Sinking  Fund  of  1802 63 

The  Sinking  Fund  during  the  War 68 

Reorganization 70 

The  Sinking  Fund  of  1817 73 

Debt  Payment  between  1837  and  1862 76 

The  Sinking  Fund  of  1862 79 

Liberal  Interpretation 82 

Conclusions 84 

III.  THE  THEORY  OF  AMORTIZATION 86 

Our  Theory  Concerned  with  Settled  Policy 86 

The  Meaning  of  the  Term  "  Sinking  Fund." 87 


99730 


Table  of  Contents.  [31 G 

PAGE 

Contingent  Amortization 89 

Uniform  Amortization 91 

Effect  of  Amortization  in  a  Borrowing  Period 92 

When  Suspension  is  not  Necessary 93 

Forms  of  Uniform  Amortization 94 

Progressive  Amortization 96 

Proportional  Amortization 101 

Variations  from  the  Type 102 

Tendency  to  Uniform  Treatment  of  a  Public  Debt 103 

Suspension  of  Amortization 103 

What  is  the  Best  Mode  of  Amortization? 104 


INTRODUCTION. 


To  understand  the  nature  and  workings  of  the 
device  known  as  the  sinking  fund,  we  must  study 
it  as  it  appears  in  the  financial  history  of  England 
and  of  the  United  States.  In  the  former  we  have 
exemplified  all  the  financial  mistakes  to  which  a 
wrong  theory  of  amortization  can  give  rise;  in  the 
latter  we  discover  the  slow  emergence  of  certain 
ultimate  forms  of  amortization,  on  which  both  expe 
rience  and  scientific  analysis  set  the  seal  of  approval. 
Both  taken  together  furnish  ample  basis  for  a  theo 
retical  treatment  of  the  payment  of  public  debts. 
The  study  then  falls  under  the  three  heads:  English 
Amortization,  American  Amortization,  The  Theory 
of  Amortization. 


UNIVERSITY 

OF 


SINKING  FUNDS, 


I. 

ENGLISH  AMORTIZATION. 
The   Walpole-Stanliope  Sinking  Fund. 

The  permanent  funded  English  debt  began  in 
1694,  when  twelve  million  pounds  were  borrowed 
from  the  Bank  of  England  in  consideration  of  its 
charter.  During  the  Dutch  wars  the  debt  rapidly 
grew  until,  in  1716,  it  amounted  to  forty  millions. 
The  various  loans  making  up  the  debt  were  based  on 
the  pledging  or  mortgaging  of  specific  taxes,  or  reve 
nues.  Loans  thus  guaranteed  were  said  to  be 
"funded."  The  interest  of  each  loan  was  provided 
for  by  a  particular  tax  pledged  for  a  term  of  years, 
while  the  principal  was  to  be  discharged,  either  by 
the  regular  excess  payment  of  an  annuity,  or  by  the 
varying  surplus  yielded  by  the  tax.  By  this  "fund 
ing"  policy  the  public  debt  came  to  consist  of  many 
small  loans,  each  bottomed  on  its  own  petty  item  of 
revenue.  This  complicated  and  rigid  system,  wherein 
the  growth  of  one  source  of  income  could  not  be  used 
to  eke  out  the  shrinkage  of  another,  proved  unfit  for 
a  growing  public  finance.  In  1716,  the  many  little 
items  of  revenue,  mortgaged  to  some  particular  debt, 
were  grouped  together  into  four  large  funds,  the 
Aggregate,  South  Sea,  General,  and  Sinking  funds. 


10  Sinking  Funds.  [320 

The  first  three  were  composed  of  permanent  taxes, 
and  secured  the  interest  on  three  great  blocks  of 
public  debt.  The  fourth  was  made  up  of  the  surpluses 
of  the  first  three  left  over  after  satisfying  all  charges 
upon  them,  and  was  called  the  "Sinking  Fund," 
because  it  was  appropriated  to  the  sinking  of  the 
national  debt,  "and  to  no  other  purpose."  As  it  was  to 
be  invariably  applied  to  interest-bearing  debt,  the 
fund  was  sure  to  show  a  steady  growth.  For  as  its 
yearly  income  operated  in  extinguishing  the  debt, 
the  interest  thereby  disengaged  went,  of  course,  to 
swell  the  surpluses  that  made  up  the  sinking  fund; 
so  that  this  fund  grew  in  geometrical  ratio,  just  as  if 
it  had  enjoyed  the  right,  granted  to  later  sinking 
funds,  of  receiving  interest  on  all  debt  redeemed 
by  it. 

For  a  while  this  permanent  appropriation,  knowrn 
as  the  Walpole  Stanhope  sinking  fund,  was  a  national 
pet,  and  ministers  met  deficits  by  new  loans  rather 
than  check  the  growth  of  the  infant.  Even  during 
borrowing  periods  the  fund  served  the  purpose  of 
lulling  the  people  into  the  belief  that  the  national 
debt  was  being  swiftly  and  surely  extinguished.  In 
1727  the  interest  on  the  public  debt  was  reduced  from 
five  per  cent,  to  four,  thus  adding  four  hundred 
thousand  pounds  to  the  three  surpluses  that  together 
constituted  the  sinking  fund.  But  from  this  time  on 
gradual  encroachments  were  made  by  charging  with 
the  interest  of  new  loans  the  fund  that  had  been 
solemnly  set  aside  for  paying  the  principal  of  the 
public  debt.  In  1733,  Walpole  needing  half  a  million 
for  current  expenses,  broke  into  the  fund  this  time, 
taking  not  merely  the  interest  of  the  sum  he  wanted, 
but  the  sum  itself.  The  next  year  the  whole  yield 


321]  Sinking  Funds.  11 

of  the  fund  was  diverted  from  its  purpose,  and  the 
two  following  years  it  was  anticipated  and  mortgaged. 
In  1737  and  1738  the  national  debt  was  reduced  three 
millions  by  the  income  of  the  fund.  During  the  fol 
lowing  twelve  years  it  was  seized  for  the  use  of  the 
government.  In  1749  another  refunding  of  the  debt 
at  lower  interest  added  six  hundred  thousand  annually 
to  the  fund,  but  not  more  than  three  millions  of  debt 
were  extinguished  by  it  in  six  years  of  peace. 

In  1752  the  sinking  fund  underwent  a  change. 
The  war  of  1740-?48  had  called  for  loans  to  the  extent 
of  thirty-two  millions,  and  for  the  funding  of  these  a 
great  variety  of  new  taxes  had  been  imposed.  These 
new  taxes,  now,  together  .with  the  new  debt,  were 
carried  into  the  sinking  fund.  That  permanent 
appropriation,  which  formerly  had  been  made  up  of 
specified  surpluses  and  applied  to  the  principal  of  the 
debt,  was  now  enlarged  by  taxes  and  charged  with 
the  interest  of  new  loans.  In  a  word,  its  original 
character  of  sinking  fund  was  utterly  obscured.  Thus 
inflated,  the  income  of  the  fund  averaged  two  and 
one-half  millions  a  year  till  the  outbreak  of  the  Rev 
olutionary  war.  The  total  decrease  in  the  British 
debt  for  twelve  years  was,  however,  but  a  trifle  over 
this  sum.  During  the  war  England  borrowed  heavily, 
so  that  at  the  accession  of  Pitt  in  1784,  the  debt 
reached  the  figure  of  two  hundred  and  forty-five 
millions.  One  of  Pitt's  first  reforms  was  to  lump 
together  the  revenues  distributed  among  the  four 
permanent  funds  into  a  ' 'consolidated  fund,"  and  to 
hypothecate  this  fund  to  the  public  creditors.  This 
was  the  origin  of  British  "consols.''  He  next 
addressed  himself  to  maturing  a  plan  for  extinguish 
ing  a  debt  which  was  then  exciting  general  alarm. 


12  Sinking  Funds.  [322 

The  Theories  of  Dr.  Price. 

In  1772,  Dr.  Price,  an  eminent  clergyman,  and  a 
closet  financier,  published  an  "Appeal  to  the  Public 
on  the  Subject  of  the  National  Debt,"  which  was 
widely  read  by  an  anxious  public.  In  this  book  Dr. 
Price  advanced  much  ingenious  calculation  and  rea 
soning  to  show  the  magical  effect  of  a  permanent 
sinking  fund.  By  this  he  meant  that  a  certain  sum 
should  be  annually  set  aside  for  the  extinguishment 
of  the  national  debt.  This  sum  should  be  used  in 
buying  public  stock  in  the  market  at  the  current 
prices,  and  the  interest  accruing  on  the  stock  thus 
bought  should  be  invariably  used  in  still  further 
increasing  the  purchases.  In  this  manner  a  fund 
would  be  formed,  which  would  grow  by  compound 
interest  and,  if  maintained  inviolate,  would,  in  time, 
absorb  a  debt  of  any  size,  at  but  little  expense  to  the 
nation.  However  small  the  original  annual  appro 
priations  might  be,  they  would  be  in  this  plan 
invested  at  compound  interest,  and  would  need  only 
time  to  cancel  any  debt. 

The  efficacy  of  the  scheme,  Price  insisted,  lay  in 
keeping  up  the  annual  payments  in  war  as  well  as  in 
peace,  in  times  of  deficit  as  well  as  in  times  of  sur 
plus.  According  to  him  it  is  perfecUy  proper  to  bor 
row  money  to  maintain  the  appropriations,  inasmuch 
as  the  sums  borrowed  are  obtained  at  simple  interest 
and  invested  in  government  stocks  at  compound 
interest.  With  a  high  rate  of  interest  the  fund 
increases  only  the  more  swiftly,  and  hence  it  is 
sound  policy  to  create  new  debt  at  a  high  rate  of 
interest,  in  order  to  buy  in  old  debt  at  a  low  rate. 
Indeed,  a  debt  at  a  high  rate  of  interest,  with  a  sink 
ing  fund  attachment  will  be  discharged  more 


323]  Sinking  Funds.  13 

quickly  than  the  same  debt  with  the  same  sinking 
fund,  at  a  lower  rate.  "A  state  may  without  diffi- 
culy  redeem  all  its  debts  by  borrowing  money  at  an 
equal  or  even  higher  interest  than  the  debts  bear; 
and  without  providing  any  other  funds  than  such 
small  ones,  as  shall  from  year  to  year  become  neces 
sary  to  pay  the  interest  of  the  sums  borrowed."  The 
magical  efficacy  of  the  compound  interest  principle 
is  illustrated  by  the  fact  that  a  penny,  put  at  five 
per  cent,  compound  interest  in  the  year  1,  would  in 
1775  amount  to  three  hundred  millions  of  earths, 
all  solid  gold.  But  at  simple  interest  the  penny 
would  amount  to  seven  shillings  and  six  pence! 
Hence  the  importance  of  never  interrupting  the 
operations  of  the  sinking  fund.  "All  governments 
that  alienate  funds  destined  for  reimbursement 
choose  to  improve  money  in  the  last  rather  than  the 
first  of  these  ways." 

It  is  not  necessary  to  open  up  the  theory  of  amor 
tization  here,  in  order  to  expose  fallacies  that  time 
has  already  exploded.  Let  it  suffice  to  say  that  the 
chief  and  central  misconception  of  Dr.  Price  was  in 
regarding  government  stocks  as  productive  property. 
It  was  this  that  led  him  to  look  upon  the  interest  on 
stocks  bought  in  for  the  sinking  tund  as  "earnings," 
and  not  as  the  proceeds  of  taxation.  It  was  this  that 
prevented  him  from  seeing  that  the  magical  reduction 
effected  by  a  small  annual  appropriation  is  due  to 
the  fact,  that  for  many  years  the  nation  enjoys  no 
easement  from  its  operations  on  its  debt,  but  con 
tinues  to  pay  fictitious  interest  upon  portions  of  its 
debt  bought  up  and  thus  already  practically  redeemed. 
After  all,  the  national  debt  is  extinguished  by  taxa- 


14  Sinking  Fund*.  [324 

tion.     But  in  Price's  scheme  taxes  are  paid  over  not 
as  reimbursement,  but  as  interest  on  defunct  stock. 

Pitt's  Sinking  Fund. 

The  theories  of  Price,  though  clearly  refuted  by  a 
few  obscure  writers,  were  widely  accepted,  and  when 
Pitt  resolved  upon  the  reduction  of  the  national  debt, 
he  adopted  them  as  the  basis  of  his  system.  In  1786, 
at  a  time  when  the  recent  doubling  of  the  national 
debt  caused  general  alarm,  Pitt  found  himself  with  a 
clear  surplus  of  nine  hundred  thousand  pounds.  This 
surplus  raised  by  additional  taxes  to  a  million,  he  pro 
posed  to  constitute  a  permanent  sinking  fund  appro 
priation.  Following  the  advice  of  Dr.  Price,  he  deter 
mined  to  put  his  fund  beyond  the  clutch  of  needy 
finance  ministers  by.  turning  it  over  to  a  special 
branch  of  administration.  The  yearly  appropriation 
was  to  be  vested  in  a  "Board  of  Commissioners  of  the 
Sinking  Fund,"  and  by  them  applied  quarterly  to  the 
purchase  of  public  stocks,  at  or  below  par.  The  treas 
ury  was  to  pay  interest  on  this  stock  just  as  it  would 
on  any  other  outstanding  stock,  and  this  interest, 
together  with  all  temporary  annuities  that  should  fall 
in,  was  to  be  applied  quarterly,  in  the  same  manner  as 
the  original  appropriations.  These  quarterly  pur 
chases  prevented  the  accumulation,  in  the  hands  of 
the  commissioners,  of  a  sum  large  enough  to  tempt 
the  cupidity  of  a  finance  minister,  while  their  regu 
larity  made  it  impossible  so  to  cook  the  accounts  of 
the  board,  as  to  conceal  any  invasion  of  the  fund. 

The  yearly  payment  w^as  to  be  one  million  pounds. 
When  this  should  be  increased  by  lapsed  annuities 
and  by  the  annual  interest  on  stock  constituting  the 
sinking  fund  to  four  millions,  it  was  to  be  at  the  dis- 


325]  Sinking  Funds.  15 

posal  of  Parliament.  Until  then  the  payment  on 
behalf  of  the  sinking*  fund  took  precedence  of  every 
thing  except  the  interest  on  the  public  debt,  and 
could  not  be  withheld  except  by  an  act  of  repeal, 
passed  in  full  view  of  the  public.  When  Fox  objected 
to  a  plan  that  would  tie  up  so  much  of  the  national 
income,  even  in  time  of  war,  he  was  told  that  the 
essence  of  the  scheme  was  to  keep  the  sinking  fund 
sacred,  and  that  any  diversion  of  the  fund  would 
prove  its  ruin.  He  succeeded,  however,  in  getting 
a  clause  inserted,  authorizing  the  commissioners  of 
the  sinking  fund  to  accept  as  much  of  any  new  loan 
as  they  should  have  the  money  to  pay  for.  Strange 
to  say,  this  clause,  which  permitted  the  government 
to  borrow  back  its  payments  to  the  sinking  fund, 
and  which  made  useless  all  the  safeguards  thrown 
about  the  fund  to  secure  its  inviolability,  was 
heartily  commended  by  Pitt.  Still  stranger  is  it, 
that  this  wise  clause  was  never  acted  upon  in  raising 
any  of  the  great  war  loans,  but  was  first  followed  in 
1819,  in  a  time  of  peace.1 

After  brief  debate  this  plan  passed  Parliament 
with  no  dissenting  voice,  and  received  the  royal 
approval  amid  general  congratulation  and  enthusiasm. 
"Never  was  the  admiration  of  any  public  measure 
more  warm  and  general,  and  never  was  there  fuller 
confidence  in  the  soundness  of  the  principles  upon 
which  it  was  founded. ";  Huskisson  declared  Pitt's 
sinking  fund  '  'perhaps  the  proudest  monument  raised 
by  the  virtues  and  the  genius  of  Mr.  Pitt,  to  his  own 
fair  name,  and  one  that  should  be  preserved  unmuti- 
lated  and  entire,  in  all  the  strength  and  symmetry  of 

lrromlme's  "Life  of  Pitt,"  pp.  164-167. 
2Tomline,  p.  164. 


16  Sinking  Funds.  [326 

proportion  assigned  to  it  by  the  hands  of  its  immortal 
author."  Tomline  thinks  that  Pitt's  inviolable  sink 
ing  fund  "probably  saved  this  country  from  becom 
ing  a  province  of  France." 

In  1792,  Pitt's  system  was  supplemented  by  an  act 
establishing  an  accumulating  sinking  fund  of  one 
per  cent,  on  the  nominal  capital  of  all  loans.  By  this 
means  every  debt  was  at  its  creation  to  be  "put  in 
course  of  liquidation.'-  This  principle  was  abandoned 
for  new  loans  in  1798  and  the  following  years,  and 
eighty-six  millions  of  debt  were  created  without  a 
one  per  cent,  sinking  fund.  In  1802,  however,  this 
principle  was  again  revived  and  adhered  to  for  a 
number  of  years. 

At  first  Pitt's  sinking  fund  was  an  honest  one 
and  rested  on  a  clear  surplus.  But  in  1793  the  war 
with  France  began,  and  for  a  very  long  period  Eng 
land's  balance  sheet  showed  no  surplus,  but  only 
huge  deficits.  In  this  new  situation  amortization 
would  have  been  suspended,  if  sound  doctrine  had 
been  abroad.  But  under  the  influence  of  Dr.  Price's 
theories,  Parliament  continued  for  many  years 
enlarging  and  strengthening  the  sinking  fund,  till  in 
1813  sixteen  million  pounds  were  used  in  reducing 
old  debt.  About  this  time  most  of  the  stock  bought 
up  and  held  by  the  commissioners  of  the  sinking 
fund  was  cancelled,  thus  reducing  the  annual  fund 
by  about  six  millions  of  interest. 

Decay  of  the  Old  System. 

In  1813,  Professor  Hamilton,  of  Aberdeen,  pub 
lished  a  book  on  the  British  debt,  which  marked  an 
epoch  in  the  growth  of  financial  theory.  In  this  he 
reviewed,  one  by  one,  the  reasonings  of  Dr.  Price, 


327]  Sinking  Funds.  17 

and  laid  the  finger  of  criticism  on  the  weak  spot  in 
each.  He  pronounced  all  schemes  for  wiping  out  the 
public  debt  by  sinking  funds  operating  by  compound 
interest,  illusory.  The  excess  of  revenue  above 
expenditure,  he  maintained,  is  the  only  real  sinking 
fund  by  which  public  debt  can  be  discharged.  Amor 
tization  during  borrowing  periods  is  a  purely  fictitious 
operation  which  in  no  wise  reduces  debt,  but  really 
adds  to  it. 

With  the  publication  of  these  ideas  the  old  notions, 
which  led  a  minister  to  declare  that  the  sinking  fund 
was  "an  advantage  gained  by  nothing,"  began  to 
disappear.  Great  inroads  began  to  be  made  in  the 
old  system.  The  Parliament  of  1819  thought  it 
necessary  that  there  should  be  a  yearly  surplus  of 
income  of  five  millions  for  the  purpose  of  the  sinking 
fund.  In  1823  the  sinking  fund  was  cut  down  to 
five  millions,  though  the  practice  of  keeping  the 
stock  redeemed,  in  the  hands  of  commissioners,  was 
still  retained.  In  1828  the  old  system  lost  whatever 
shred  of  credit  it  still  possessed  by  the  appearance  of 
Lord  Grenville's  "Essay  on  the  Supposed  Advantages 
of  a  Sinking  Fund."  In  this  essay  one  of  the  former 
ardent  champions  of  Pitt's  policy  renounced  his 
former  belief  in  it,  and  recanted  his  error  in  a  for 
midable  exposure  of  the  old  fallacies. 

In  the  same  year  a  parliamentary  committee  esti 
mated  that  as  a  net  result  of  the  sinking  fund  system 
kept  up  during  war,  the  nation  had,  between  1785 
and  1829,  borrowed  £330,000,000  at  about  5  per  cent, 
interest,  in  order  to  pay  a  debt  of  the  same  magni 
tude  at  4^-  per  cent,  interest.  This  policy,  by  which 
a  debt  at  4-J  per  cent,  was  converted  into  one  at  5  per 
cent.,  meant  an  annual  loss  in  interest  of  £1,627,765 
2 


18  Sinking  Funds.  [328 

extending  over  forty-three  years.  This  was  the 
conclusion  arrived  at  without  taking  into  account 
the  cost  of  administering  the  sinking  fund,  or  the 
depreciation  of  the  public  stock  caused  by  the  custom 
of  borrowing  sums  much  larger  than  were  required 
for  national  expenses. 

In  consequence  of  these  results  the  finance  com 
mittee  denounced  a  sinking  fund  fed  by  loans,  and 
laid  down  the  axiom  that  funds  for  the  extinction  of 
debt  should  not  be  raised  by  the  creation  of  it  in 
another  shape.  It  held  that  the  only  fund  that  can 
advantageously  be  used  for  sinking  is  the  net  surplus 
of  receipts  over  expenditures.  Hence,  instead  of  fix 
ing  in  advance  the  sum  to  be  applied  to  the  principal 
of  the  public  debt,  it  was  better  to  appropriate  only 
the  net  annual  surplus,  whatever  it  might  be.  In 
view  of  the  size  of  the  debt  at  that  time,  it  was 
thought  desirable  that  there  should  be  provided  a 
yearly  surplus  of  three  millions.  But  in  case  this 
excess  should  not  be  realized,  it  would  not  therefore 
be  wise  to  resort  to  borrowing  in  behalf  of  amortiza 
tion.  Whatever  stock  was  redeemed  was  to  be 
promptly  cancelled  and  interest  was  to  be  no  longer 
reckoned  on  defunct  paper. 

"The  Old  Sinking  Fund." 

The  next  year  the  recommendations  of  the  com 
mittee  were  practically  followed.  It  was  enacted 
that  the  formal  sinking  fund  be  abolished;  that  in 
place  of  it  any  surplus,  as  it  was  realized,  should  be 
applied  quarterly  to  the  redemption  of  the  debt;  and 
that  money  should  on  no  account  be  borrowed  for 
the  fund.  The  stocks  then  standing  to  the  credit  of 
the  sinking  fund  were  to  be  destroyed,  and  interest 


329]  Sinking  Funds.  19 

on  them  was  to  cease.  The  new  fund  was  to  redeem 
annuities,  exchequer  bills,  or  other  non-interest- 
bearing  debt,  as  well  as  consols.  For  these  purposes 
the  Chancellor  of  the  Exchequer  was  to  secure,  if 
possible,  a  surplus  of  three  millions  a  year. 

The  extremely  simple  plan  of  amortization  adopted 
at  this  time  remained  for  many  years  the  only  provi 
sion  for  the  payment  of  the  British  debt.  It  was  not 
found,  however,  to  favor  any  energetic  and  effective 
reduction.  The  intended  surplus  of  three  millions 
was  never  realized  after  1829.  A  succession  of  lan 
guid  and  popularity-seeking  ministers  preferred  the 
remission  of  taxes,  or  an  expensive  foreign  policy, 
to  the  payment  of  the  debt.  In  1857  a  regular  sink 
ing  fund  was  established,  but  as  it  soon  necessitated 
the  old  practice  of  borrowing  in  order  to  pay  debt, 
it  was  abandoned. 

"The  New  Sinking  Fund." 

In  1875,  impressed  with  the  duty  of  energetically 
reducing  her  debt,  England  sought  to  make  more 
effective  provision  for  amortization.  As  the  old 
extra-budgetary  provision  had  failed,  it  was  thought 
necessary  to  bring  the  principal  of  the  debt  again 
within  the  field  of  regular  appropriation.  Instead  of 
being  put  off  with  the  "leavings,"  the  sinking  fund 
was  to  come  within  the  accounts  as  an  ordinary 
expenditure,  the  surplus  or  deficiency  of  the  year 
being  reckoned,  only  after  it  had  been  included. 

Instead  of  reverting  to  the  old  method  of  paying 
interest  to  the  sinking  fund  on  all  debt  redeemed,  the 
simple  American  plan  of  a  combined  fund  was  intro 
duced.  A  fixed  sum  larger  than  the  interest  charge 
of  the  debt  was  permanently  appropriated.  The 


20  Sinking  Funds.  [330 

excess  was  for  payment  of  the  debt.  As  each  year 
the  interest  charge  shrunk,  the  surplus  for  amortiza 
tion  was  correspondingly  enlarged.  This  provision, 
known  as  "The  New  Sinking  Fund,"  is  still  in  force. 
The  former  appropriation  of  the  annual  surplus  re 
mains  under  the  title  of  "The  Old  Sinking  Fund."  In 
In  addition  to  these  there  are  five  small  especial 
sinking  funds1  concerned  with  outlying  portions  of  the 
British  debt. 

Terminable  Annuities. 

Besides  these  devices  England  has  been  reducing 
her  debt  by  the  use  of  terminable  annuities.  Formerly 
these  were  sold  to  raise  money  or  given  to  lenders 
as  a  bounty.  Later  it  was  discovered,  that  by  con 
verting  blocks  of  the  public  debt  into  this  form  of 
obligation,  a  system  of  regular  debt  reduction  could 
be  maintained,  when  otherwise  impracticable.  By 
this  process  a  portion  of  stock  is  cancelled,  and  in 
place  of  it  an  annuity  which  includes  both  interest 
and  reimbursement,  is  issued  to  run  for  a  term  of 
years.  Once  the  conversion  is  accomplished,  the 
amortization  becomes  perfectly  automatic,  and  must 
be  maintained  in  deficit  years  as  well  as  in  surplus 
years.  Under  this  system  later  English  chancellors 
have  been  able  to  make  large  reductions  in  the  pub 
lic  debt. 


Buxton's  "Finance  and  Politics,"  Vol.  II,  p.  217,  note. 


II. 

AMERICAN    AMORTIZATION. 

Redemption  of  Paper  Money. 

The  problems  of  debt  payment  first  met  our  gov 
ernment  early  in  the  Revolution.  At  the  outset  of 
the  war  the  Second  Continental  Congress,  afraid  to 
tax  and  unable  to  borrow,  resorted  to  a  favorite  col 
onial  expedient  and  paid  the  expenses  of  the  war  by 
issuing  bills  of  credit  resting  on  the  faith  of  the  con 
federate  colonies.  These  promises  to  pay  were  to  be 
redeemed  by  the  several  colonies,  the  whole  being 
apportioned  among  them  in  proportion  to  population. 
Each  colony  was  to  secure  its  quota  of  bills  as  it  saw 
fit,  and  pay  them  into  the  general  treasury  in  four 
equal  annual  instalments,  beginning  in  1779.  If  any 
colony  could  not  secure  its  quota  of  continental  bills 
by  taking  them  for  taxes,  or  by  exchanging  its  own 
notes  for  them,  it  might  make  up  the  amount  in 
specie.  Such  specie  as  should  thus  be  paid  in  was  to 
be  retained  by  the  continental  treasurer  to  redeem 
such  outstanding  bills  as  should  be  presented  directly 
to  him.  With  these  provisions  for  redemption  Con 
gress,  in  July,  1775,  ventured  to  issue  three  millions 
of  paper  money. 

Before  the  end  of  the  year  four  more  millions  were 
issued,  and  each  colony  was  directed1  to  provide  ways 
and  means  of  sinking  its  proportion  of  bills  in  the 

1  December  26,  1775. 


22  linking  Funds.  [332 

most  effective  manner.  The  redeemed  bills  were  to 
be  cancelled  and  paid  in,  in  four  instalments,  begin 
ning  in  1783,  when  the  former  instalments  ceased. 
The  large  emissions  of  1776  so  depreciated  the  paper 
money,  that  in  1777'  we  find  Congress  again  anxiously 
urging  the  colonies  to  do  something  to  redeem  their 
quotas. 

Later  on  it  was  seen  that  a  great  war  debt  like  the 
continental  currency  could  not  be  paid  by  ordinary 
taxes,  and  there  was  talk  of  recurring  to  the  nearly 
obsolete  English  practice  of  charging  the  debt  on 
special  taxes,  or  on  specific  sources  of  permanent 
income.  In  reference  to  the  several  issues  of  bills,  a 
report  of  the  board  of  treasury  on  January  2.  1779, 
declared  it  ' -necessary  to  ascertain  the  period  of  their 
redemption  and  seasonably  to  establish  funds,  which 
in  due  time  shall  make  adequate  provision  for  the 
same." 

Thereupon  Congress  resolved  that  the  states  be 
called  upon  to  pay  in  their  respective  quotas,  of 
fifteen  millions  for  1779,  and  six  millions  annually 
for  eighteen  years  thereafter,  as  a  fund  for  sinking 
the  emissions  and  loans.  The  quotas  were  to  be  paid 
not  in  state  notes,  but  in  continental  bills,  and  these 
were  to  be  applied  to  paying  the  interest  and  princi 
pal  of  the  interest-bearing  loans.  The  residue  was 
to  be  burned.  The  circular  letter  embodying  the 
above  was  followed  in  May  by  another  raising  the 
amount  of  bills  called  for  to  sixty  millions. 

On  March  18,  1780,  Congress,  after  having  solemnly 
and  repeatedly  pledged  the  public  faith  to  the  full 
redemption  of  the  continental  paper,  bowed  to  the 
inevitable  and  recognized  the  depreciation  of  its  own 

1  January  14. 


333]  Sinking  Funds.  23 

bills.  It  undertook  itself  to  redeem  the  old  issues  by 
a  new  emission  to  be  exchanged  for  the  old  at  the 
rate  of  one  for  forty.  These  bills  were  to  be  issued 
on  the  credit  of  individual  states,  each  state  being 
assigned  its  due  quota,  and  were  to  be  redeemed  by 
special  state  funds  sufficient  to  retire  a  sixth  part  of 
the  bills  annually.  The  new  bills  bore  five  per  cent, 
interest,  were  to  be  redeemed  in  specie,  and  the  faith 
of  the  United  States  was  pledged  for  their  redemption 
in  case  any  state  failed  to  sink  its  share. 

With  the  growth  and  collapse  of  the  paper  bubble 
there  began  slowly  to  emerge  the  conviction  that  the 
state  must  wield  the  taxing  power  with  a  strong 
hand,  and  must  cut  deep  into  the  resources  of  the 
community,  if  public  credit  were  not  utterly  to  disap 
pear.  The  resolutions  of  a  convention  held  at  Phila 
delphia  in  August,  1780,  with  a  view  to  forming  a 
closer  union,  show  the  growth  of  better  financial 
ideas.  Resolution  six  urged  that  the  credit  of  the 
continental  bills  be  sustained  by  all  the  states  sink 
ing  their  quotas  by  taxation,  or  by  other  means. 
Resolution  seven  recommended  that  each  state  imme 
diately  establish  funds  for  sinking  annually  at  least 
one-sixth  of  the  bills  they  shall  emit,  the  tax  for 
raising  such  funds  to  be  paid  the  first  year  in  specie, 
the  remaining  five  years  in  specie  or  in  the  bills  to  be 
redeemed.  The  object  was  "that  the  credit  of  the 
paper  may  rest  upon  the  funds  provided  for  their 
redemption,  as  every  attempt  to  support  their  credit 
by  forcing  them  into  circulation  tends  to  defeat  the 
purpose  and  to  depreciate  them."  Thus  the  dream 
of  sustaining  unfunded  paper  was  dissolved.  It  was 
recognized  that  public  faith  rests  not  on  vague  and 


2t  Sinking  Funds.  [334 

general  promises,  but  on  the  setting  apart  of  actual 
and  adequate  revenues. 

Despite  all  wise  resolves,  the  new  issues  of  paper 
money  soon  sank  to  the  level  of  the  old,  and  in  1781 
the  whole  irredeemable  mass  vanished  from  circula 
tion  and  collected  in  the  hands  of  speculators.  Here 
the  unpaid  bills  were  no  longer  a  dangerous  and  dis 
turbing  element,  and  here  Congress  left  them  till  a 
more  convenient  season  for  liquidating. 

Loans. 

But  no  sooner  had  the  currency  problem  in  a  way 
solved  itself  than  Congress  began  to*  be  embarrassed 
by  pressure  from  another  quarter.  During  the  con 
test  loans  had  been  filled  and  interest-bearing  certifi 
cates  issued,  based  on  the  promise  of  France  to  pay 
in  specie  the  interest  on  whatever  sums  could  be 
raised  at  home.  At  the  close  of  hostilities,  however, 
France  was  compelled,  in  justice  to  herself,  to  inter 
rupt  her  subsidies  and  loans,  while,  owing  to  the 
disastrous  career  of  paper  money  here,  private  capi 
talists  were  unwilling  to  lend  without  the  guarantee 
of  established  funds.  In  1781,1  therefore,  Congress, 
after  having  in  the  previous  year  summarily  redeemed 
the  continental  currency,  cast  about  for  means  to 
meet  the  burden  of  domestic  debt  soon  to  be  rolled 
upon  its  shoulders  by  the  drying  up  of  foreign  aid 
and  the  difficulty  of  negotiating  European  loans. 
On  February  3,  it  resolved  that  it  be  recommended  to 
the  several  states  as  indispensably  necessary  that 
they  vest  a  power  in  Congress  to  levy  for  the  use  of 
the  United  States  an  ad  valorem  import  duty  of  five 
per  cent;  that  the  moneys  arising  from  the  duty  be 
1  February  3. 


335]  Sinking  Funds.  25 

appropriated  to  the  discharge  of  the  principal  and 
interest  of  the  debts  already  contracted,  or  to  be  con 
tracted,  for  the  war;  and  that  the  duty  be  continued 
till  these  debts  be  fully  and  finally  discharged. 

Plan  of  Robert  Morris. 

While  Congress  was  thus  vainly  urging  upon  jeal 
ous  and  suspicious  states  the  necessity  of  national 
revenues,  Robert  Morris,  in  his  letter1  of  July,  1782, 
to  that  body  outlined  a  complete  scheme  of  construc 
tive  finance.  After  reviewing  the  industrial  advan 
tages,  to  a  new  country,  of  borrowing  over  ruthless 
taxation,  and  of  foreign  loans  over  domestic  loans, 
he  dwelt  upon  the  utter  loss  of  the  once  stable  public 
credit.  The  causes  were:  the  repudiation  of  the  old 
continental  bills,  the  reluctance  of  the  states  to  tax, 
the  feeble  financial  powers  of  the  government,  and 
the  absence  of  any  provision  for  the  public  debt. 
The  first  step  in  the  restoration  of  credit  is,  said 
Morris,  the  retirement  of  all  outstanding  continental 
bills.  The  second  is  the  funding  of  the  public  debt, 
that  is,  the  pledging  of  specific  revenues  to  the  ser 
vice  of  particular  loans.  The  scheme  of  paying 
domestic  interest  by  the  proceeds  of  foreign  loans  is 
ruinous  and  should  be  abandoned.  The  interest  of 
the  public  debt  must  be  provided  for  by  distinct 
funds.  These  must  be  ample,  because  a  deficit  would 
be  disastrous,  while  an  excess  would  serve  to  pay 
immediately  a  part  of  the  debt,  and  thus  strengthen 
credit.  Morris  thereupon  proposes  a  five  per  cent, 
tariff,  a  one  dollar  poll  tax,  a  land  tax  of  one  dollar 
per  hundred  acres,  and  an  excise  of  one-eighth  of  a 
dollar  per  gallon  on  distilled  liquors.  On  each  of 
1  "Diplomatic  Correspondence",  Vol  XII,  p.  211. 


26  Sinking  Funds.  [336 

these,  estimated  at  half  a  million,  a  loan  could  be 
opened  payable  in  specie  or  in  debt  evidences  of  a 
particular  description.  It  is  further  proposed  that 
the  casual  surplus  of  each  of  these  taxes  should  be 
carried  to  a  sinking  fund,  on  the  credit  of  which  new 
loans  might  be  opened  if  necessary.  The  public  land 
Morris  regarded  as  a  future  source  of  revenue,  but 
as  yet  not  available  for  the  existing  debt. 

Efforts  to  Provide  for  the  Debt. 

Six  months  later  Congress,  in  order  to  induce  the 
niggardly  and  distrustful  states  to  grant  the  power 
to  tax,  passed  an  important  resolution  reported  by  a 
committee  headed  by  Hamilton.  It  was  resolved  "that 
whenever  the  net  produce  of  any  funds  recommended 
by  Congress  and  granted  by  the  states,  for  funding 
the  debt  already  contracted  or  for  procuring  future 
loans  for  the  support  of  the  war  shall  exceed  the  sum 
requisite  for  paying  the  interest  of  the  whole  amount 
of  the  national  debt,  which  these  states  may  owe  at 
the  termination  of  the  present  war,  the  surplus  of 
such  grants  shall  form  a  sinking  fund,  to  be  inviola 
bly  appropriated  to  the  payment  of  the  principal  of 
the  said  debt,  and  shall  on  no  account  be  diverted  to 
any  other  purpose."  A  little  later,  in  response  to  the 
complaint  and  petitions  of  the  public  creditors  to 
whom  no  interest  had  been  paid  since  March  1, 1782, 
it  was  resolved  that  the  establishment  of  permanent 
and  adequate  funds  on  taxes  or  duties  was  necessary 
for  doing  justice  to  the  public  creditors,  for  restoring 
public  credit,  and  for  providing  for  the  war. 

The  same  session  Congress  passed  an  act  making 
the  most  ample  provision  in  its  power  for  the  public 
debt.  The  government  was  to  be  invested  with  the 


337]  Sinking  Funds.  27 

right  to  levy  for  twenty-five  years  certain  import 
duties,  estimated  to  yield  about  a  million  annually, 
the  proceeds  to  be  applied  solely  to  the  debt  of  the 
United  States.  As  the  proposed  tariff  still  left 
$1,500,000  of  yearly  interest  unprovided  for,  Congress 
recommended  that  this  charge  be  quoted  among  the 
states  and  raised  by  special  taxes  or  revenues  estab 
lished  for  twenty-five  years.  Accompanying  the 
act  was  an  address  to  the  states,  setting  forth  that 
on  January  1,  1783,  the  foreign  debt  was  $7,885,085, 
the  domestic  debt,  $34,115,290,  and  the  total,  $42,- 
000,375  ;  the  annual  interest  was  $2,415,956,  of  which 
$915,956  was  to  be  raised  by  national  taxation,  the 
rest  by  income  from  the  states,  and  from  the  sales 
of  public  lands. 

This  promising  plan,  like  its  predecessor,  was 
foiled  by  the  stubborn  particularism  of  Rhode  Island. 
But  there  was  yet  another  resource.  Urged  by  Con 
gress,  the  individual  states,  after  the  war,  ceded  their 
western  lands,  thus  endowing  the  poverty-stricken 
national  government  with  a  vast  territorial  domain. 
As  petty  local  jealousy  and  state  narrowness  thwarted 
every  effort  to  establish  national  revenues,  Congress 
turned  to  the  sale  of  public  lands  as  a  final  resource. 
The  ordinance  of  1784-5  proposed  that  all  moneys, 
arising  from  the  sale  of  land  warrants,  should  be 
applied  to  the  sinking  of  the  public  debt,  and  to  no 
other  purpose  whatsoever.  Although  this  paragraph 
was  omitted  at  the  final  stage  of  the  ordinance,  the 
object  of  it  was  secured.  In  a  report  of  February  2, 
1786,  it  is  admitted  that  the  United  States  are  in  pos 
session  of  "another  fund,"  arising  from  the  cession 
of  vacant  and  unappropriated  land  by  individual 
states.  But  this,  as  public  securities  are  received  in 


28  Sinking  Funds.  [338 

payment,  will  bring  but  little  specie  into  the  treasury. 
Being  depreciated  considerably  below  and  receivable 
at  par  with  specie,  it  is  to  be  presumed  the  purchas 
ers  will  procure  these  securities  for  the  purpose. 
These  lands  may  be  calculated  on,  therefore,  as  a 
fund  only  for  the  discharge  of  the  domestic  debt. 
Thus  by  land  sales,  and  by  taxes  of  which  a  large 
share  was  permitted  to  be  paid  in  securities,  the  debt 
was  slowly  being  absorbed. 

On  the  other  hand,  it  was  rapidly  growing  owing 
to  the  conversion  of  unpaid  interest  into  principal. 
From  1782  to  1786  the  accummulation  of  back  inter 
est  was  over  six  millions!1  The  only  acknowledg 
ment  of  this  obligation  was  the  issue  of  certificates 
of  interest,  or  "  indents."  These  circulated  freely  as 
a  kind  of  depreciated  currency,  and  operated  the 
same  as  the  continental  bills.  When  the  debt  was 
funded,  in  1791,  the  mass  of  these  indents  was  over 
thirteen  millions.  Only  by  squeezing  the  certificates 
it  had  just  given,  from  the  pocket  of  the  tax-payer 
again,  could  Congress  check  the  growth  of  the  debt. 
Of  regular  payment  or  redemption,  there  was  none, 
for  specie  was  not  forth-coming  in  sufficient  quanti 
ties,  Congress'  only  resource  was  repeated  requisi 
tion,  which  yielded  very  little  specie.  Thus,  in  1781, 
a  requisition  of  88,000,000  yielded  only  $1,486,154. 
From  November  1,  1781,  till  February  1,  1786,  the 
states  were  assessed  over  fifteen  millions.  Of  this 
they  paid  only  $2,450,803.  From  November,  1784, 
till  April,  1788,  only  §996,448  was  received  from  the 
states.  

»Elliot 


339]  Sinking  Funds.  M 

Foreign  Loans. 

The  history  of  foreign  loans  under  the  Confederation 
is  interesting  and  characteristic.  By  a  settlement  of 
Franklin  with  the  French  court  in  July,  1782,  it 
appeared  that  the  loans  to  the  United  States  amounted 
to  eighteen  million  livres.  On  this  sum  the  king 
relinquished  not  only  all  interest  till  date,  but  all 
interest  till  peace  should  be  concluded.  The  princi 
pal,  with  5  per  cent,  interest,  was  payable  in  twelve 
equal  annual  instalments,  beginning  three  years  after 
a  peace  with  Great  Britain  should  be  signed.  Besides 
this  there  was  a  loan  of  ten  million  livres  made  by 
Holland  on  the  security  of  the  French  king.  This 
debt  at  4  per  cent,  was  reimbursable  in  ten  equal 
annual  instalments,  beginning  November  5,  1787. 
The  next  year1  a  further  loan  of  six  million  livres 
was  granted,  payable  between  1797  and  1803.  These 
sums,  together  with  four  millions  due  French  citi 
zens,  reached  the  round  figure  of  thirty-eight  millions 
of  livres,  or  about  seven  million  dollars. 

Between  1782  and  1788  the  Government  succeeded 
in  negotiating  four  loans  in  Holland,  one  for  five 
million  florins,  one  for  two  millions,  and  two  loans 
for  a  million  each.  The  payment  of  the  interest  on 
the  foreign  loans  was  regular,  but  the  interest  came 
directly  from  the  proceeds  of  the  loans  themselves. 
The  two  one-million  loans  were  expressly  obtained 
and  pledged  to  the  payment  of  interest  on  the  pre 
ceding  ones.  Each  of  the  four  Holland  loans  was 
payable  in  four  instalments,  beginning  eleven  years 
after  date.  The  first  payment  was  due  in  1793. 
Although  frequent  recourse  to  the  loan  market 


30  .  Sinking  Fiinds.  [340 

enabled  the  Confederation  to  maintain  its  credit  in 
Holland,  it  repeatedly  broke  its  engagements  with 
France.  Not  only  was  the  interest  defaulted  for  sev 
eral  years,  but  the  instalments  of  $462,000  falling 
due  in  1787,  1788  and  1789  remained  unpaid  despite 
the  urgent  need  of  the  French  treasury.  At  the 
close  of  1789  the  arrearages  of  interest  and  the 
unpaid  instalments  of  the  foreign  debt  amounted  to 
over  three  millions. 

Summary. 

The  effect  of  the  bad  financiering  of  the  Confeder 
ation  on  the  debt  is  thus  summarized  by  Gallatin  : 

"  From  the  1st  of  January,  1784,  to  the  1st  of  Jan 
uary,  1790,  the  principal  of  the  domestic  debt  was 
reduced  by  the  sales  of  land,  which  amounted  to  about 
$1,100,000;  but  in  the  meanwhile,  the  interest  ac 
crued  was  near  ten  millions  of  dollars,  of  which 
about  six  millions  remained  unpaid. 

"  During  the  same  period  the  greatest  part  of  the 
interest  on  the  foreign  debt  accumulated  to  an 
amount  of  about  $1,700,000;  and  a  new  debt  was 
contracted  in  Holland  of  83,600,000.  The  whole  debt, 
foreign  and  domestic,  increased  therefore,  during 
those  six  years  by  a  sum  exceeding  ten  millions  of 
dollars."1 

The  New  Government. 

At  the  final  stage  of  the  old  regime  the  country 
wore  the  appearance  of  bankruptcy.  Credit  was  kept 
alive  only  by  the  hope  that  the  new  government 
would  unseal  sources  of  revenue  inaccessible  under 
the  defective  Confederation.  "The  Dutch,"  writes 

'Writings,  Vol.  Ill,  p.  124. 


341]  Sinking  Funds.  31 

Jefferson,  in  May,  1788,  "consider  us  the  most  certain 
nation  on  earth  for  the  principal.  The  whole  body  of 
money  dealers  ....  look  forward  to  the  new 
government  with  a  great  deal  of  partiality  and 
interest."  At  home  the  public  securities  that  had 
commanded  only  fifteen  cents  on  the  dollar,  rose 
from  January  to  November,  1789,  thirty-three  and-a- 
third  per  cent.,  and  from  November  to  the  end  of  the 
year  fifty  per  cent.  more.  The  publication  of  Hamil 
ton's  report  carried  the  price  to  fifty  cents  on  the 
dollar. 

Of  the  attributes  of  the  new  government  the  one, 
perhaps,  most  coveted  by  patriots  and  statesmen  was 
the  power  "to  lay  and  collect  taxes,  duties,  imposts, 
and  excises."  Accordingly  upon  the  establishment 
of  the  Treasury  Department  in  1789,  Congress 
directed  Hamilton,  the  first  Secretary  of  the  Treasury, 
to  report  a  plan  for  the  support  of  the  public  credit. 
The  plan  presented  by  him  in  his  "Report  on  the 
Public  Credit,"  of  January  14, 1790,  was  as  follows: — 

The  Report  on  the  Public  Credit. 

The  state  is  scrupulously  to'perform  the  contracts 
with  its  creditors.  As  these  involved  the  right  of 
full  transfer,  the  state  should  make  no  discrimination 
prejudicial  to  the  present  holders  of  the  public  debt. 
Since  the  state  can  justly  make  no  discrimination 
between  different  classes  of  creditors,  it  should 
assume  the  debts  contracted  by  the  individual  states 
for  the  common  defence.  Arrears  of  interest  are 
entitled  to  equal  provision  with  debt  principal.  The 
foreign  debt,  with  interest  arrears,  amounted  to 
$11,221,564;  the  domestic  debt  to  $42,414,085.  The 
total  annual  interest  at  existing  rates  on  the  whole 


32  Sinking  Funds.  [342 

debt,  including  twenty-five  millions  of  state  debts  to 
be  assumed,  would  be  84,587,444.  As  provision  for 
this  sum  would  strain  the  resources  of  the  state, 
Hamilton  hopes  the  creditors  may  be  induced  by 
offer  of  fair  terms  to  modify  their  claims.  This  is 
but  just  owing  to  the  prospect  of  a  fall  in  the  rate  of 
interest  to  five  per  cent,  in  five  years,  and  to  four  per 
cent,  in  twenty.  It  is  proposed,  therefore,  to  raise  a 
loan  payable  in  debt  and  ample  to  absorb  all  out 
standing  domestic  obligations.  For  every  one  hun 
dred  dollars  of  evidences  of  debt  subscribed  to  this 
loan  the  subscriber  should  be  entitled  either  to  have 
two-thirds  in  funded  six  per  cent,  stock,  and  the 
remainder  in  land  at  twenty  cents  per  acre;  to  receive 
the  whole  in  four  per  cent,  stock  and  $13.80  in  land: 
to  receive  two-thirds  in  six  per  cent.,  stock  redeem 
able  at  the  rate  of  not  more  than  one  per  cent, 
yearly,  an^  826.88  of  similar  stock  in  ten  years;  or 
to  receive  a  life  annuity.  In  addition  to  this  loan  of 
conversion  there  should  be  a  loan  of  ten  millions  pay 
able  half  in  debt  and  half  in  specie. 

To  meet  the  annual  charges,  tonnage  fees  and  im 
port  duties  are  proposed.  The  proceeds  should  be 
devoted  in  the  following  order;  to  the  foreign  debt, 
the  civil  list,  the  interest  of  the  new  loan,  and  the 
payment  of  the  unsubscribed  old  debt.  The  income 
from  the  postoffice,  estimated  at  $100,000,  is  to  be 
reserved  as  a  sinking  fund.  The  secretary,  though 
regarding  the  funding  of  the  national  debt  as  a 
national  blessing,  is  yet  so  far  from  believing  that 
public  debts  are  public  benefits,  that  he  wishes  to  see 
it  incorporated  in  our  system  as  a  fundamental 
maxim,  that  the  creation  of  debt  shall  always  be 
accompanied  by  the  means  of  extinguishment.  This 


343]  Sinking  Funds.  33 

is  the  true  secret  of  rendering  public  credit  immortal. 
It  is,  therefore,  advised  that  the  net  product  of  the 
postoffice  to  a  sum  not  exceeding  one  million  dollars 
be  vested  in  a  Board  of  Commissioners,  to  consist  of 
the  Vice-President,  Speaker,  Chief  Justice,  Secretary 
of  the  Treasury,  and  Attorney  General,  for  the  time 
being.  The  sum  shall  be  held  in  trust  and  applied  by 
them  to  the  discharge  of  the  existing  public  debt, 
either  by  purchases  of  stock  in  the  market,  or  by 
payments  on  account  of  the  principal,  as  shall  appear 
to  them  most  advisable  in  conformity  to  public 
engagements.  It  is  furthermore  suggested  that  the 
commissioners  be  authorized  to  borrow  on  their  credit 
a  sum  not  exceeding  twelve  million  dollars  to  be 
applied: 

First — To  pay  the  sums  due  on  the  foreign  debt. 

Secondly — To  supply  any  deficiency  of  funds  for 
the  interest  on  the  domestic  debt. 

Thirdly — To  refunding  the  foreign  debt  at  five  per 
cent. 

Fourthly— To  purchasing  the  domestic  stock  on  the 
market  when  below  par. 

The  financial  system  of  Hamilton  was  in  its  main 
features  incorporated  into  the  funding  act  of  August 
4,  1790,  carried  through  in  the  face  of  much  opposi 
tion  and  objection.  The  central  idea  of  this  act  is 
the  funding  of  the  debt.  Previously  the  debt  was 
provided  for  by  annual  grants.  Under  this  system 
the  claims  of  the  creditor  were  set  every  year  at  the 
hazard  of  the  passion,  partisanship,  or  intrigue  of  any 
one  of  the  three  branches  of  the  legislative  depart 
ment.  Public  faith  could  be  broken  by  the  non-con 
currence  of  one  branch.  But  under  our  funding  sys- 
3 


34  Sinking  Funds.  [3^4 

tern  the  public  creditor  acquired  a  proprietary  right 
over  the  constituted  funds.  The  revenues  of  the  state 
were,  in  part,  mortgaged  for  his  benefit.  His  debt 
was  supposed  to  be  secured  not  by  a  mere  promise, 
but  by  a  material  pledge.  However  that  may  be,  it 
is  certain  that,  once  provided  for,  the  creditor  was 
safeguarded  against  breach  of  the  public  faith,  not 
only  by  the  self-preserving  inertia  of  any  measure 
of  settled  policy,  such  as  a  permanent  appropriation, 
but  also  by  the  requirement  that  three  branches,— 
House,  Senate,  President, — should  concur  in  its 

repeal. 

The  Funding  Act. 

The  funding  act  reserves  from  the  current  reve- 
*  nues  six  hundred  thousand  dollars,  or  such  sum  as 
may  from  time  to  time  be  appropriated  for  current 
expenses.  As  much  of  the  residue  as  may  be  needed 
is  appropriated  to  the  payment  of  interest  on  foreign 
loans  existing,  or  on  further  loans  that  may  be  made 
for  paying  off  the  existing  foreign  loans, — to  continue 
until  these  loans  shall  be  satisfied.  With  this  is 
coupled  authority  for  the  President  to  raise  a  loan 
not  exceeding  twelve  millions  to  be  applied,  in  the 
first  instance,  to  paying  the  arrears,  instalments,  or 
principal  of  the  foreign  debt.  Like  most  of  the  Hol 
land  Mans,  this  must  be  reimbursable  within  fifteen 
years. 

For  the  interest  on  the  domestic  loans  proposed, 
Congress  made  inviolable  and  permanent  appropria 
tion  of  all  moneys  arising  under  the  existing  revenue 
laws,  excepting  the  part  above  reserved.  That  these 
might  never  be  diverted  to  any  other  purpose,  the 
account  of  their  receipt  and  disbursement  was  to  be 
kept  distinct  from  the  product  of  any  other  taxes, 


345]  Sinking  Funds.  35 

except  such  as  should  be  levied  for  a  like  purpose. 
The  faith  of  the  state  was  furthermore  pledged  to 
provide  sufficient  and  permanent  additional  funds  for 
the  full  payment  of  interest  on  all  new  stock. 

In  return  for  this  new  and  special  security,  the 
creditor,  it  was  hoped,  would  voluntarily  consent  to 
a  reduction  of  his  income.  To  meet  the  interest  at 
the  existing  rate  of  6  per  cent,  the  government  would 
require  a  revenue  of  $5,000,000.  This  was  deemed 
too  severe  a  strain  to  put  upon  untried  fiscal  machin 
ery.  Accordingly,  the  funding  act  contemplated 
providing  for  the  domestic  debt  on  a  four  per  cent, 
basis.  This  reduction  was  to  be  effected  by  a  new 
loan,  the  subscriptions  thereto  being  made  payable 
in  evidences  of  public  debt.  The  old  six  per  cent,  cer 
tificates  were  to  be  exchanged  for  new  funded  stocks, 
or  bonds.  For  every  sum  subscribed  in  principal  of 
debt,  two  bonds  were  to  be  issued,  one  for  an  amount 
equal  to  two-thirds  of  the  subscription,  to  bear  six  per 
cent.;  the  other  for  one-third  of  the  subscription,  to 
bear  six  per  cent,  after  1800.  These  two  kinds  of  debt 
were  known  as  "six  per  cent,  stock"  and  " deferred 
stock."  As  they  were  liable  to  redemption  at  the 
rate  of  not  more  than  two  per  cent,  per  annum,  they 
could  be  converted  at  will  into  an  eight  per  cent, 
annuity  terminable  in  about  twenty-two  years. 

After  the  principal  of  the  domestic  debt  was  pro 
vided  for,  there  remained  about  thirteen  millions  of 
"indents,"  covering  interest  accruing  up  to  1791. 
These  were  made  receivable  only  for  a  special  kind 
of  stock,  redeemable  at  will,  and  bearing  three  per 
cent,  interest.  The  federal  debt  once  disposed  of,  the 
funding  act  provided  for  the  assumption  of  $21,500,- 
000  of  state  debts  incurred  in  the  common  cause. 


36  Sinking  Funds.  [34G 

This  was  to  be  done  by  exchanging  that  quantity  of 
the  new  stocks,  in  certain  proportions,  for  an  equal 
amount  of  the  certificates,  or  indents,  issued  by  indi 
vidual  states.  The  final  provision  is  that  the  pro 
ceeds  of  all  sales  of  public  lands  be  appropriated  to 
the  sinking  of  the  public  debt. 

In  effect,  then,  the  funding  act  authorized  a  for 
eign  loan,  created  three  kinds  of  domestic  stock  —  the 
six  per  cents.,  deferred  6s,  and  three  per  cents.,  pro 
vided  for  the  conversion  into  this  new  stock  of  the 
old  Revolutionary  debt,  the  accrued  interest,  and  the 
state  debts,  and  finally  made  permanent  appropria 
tions  both  for  the  interest  and  for  the  principal  of  the 
new  stock. 

To  the  public  creditors  the  conversion  of  the  debt 
into  a  funded  loan  was  not  a  decree  but  a  proposal. 
He  who  refused  to  subscribe  did  not  forfeit  his  claim. 
His  rights  were  unimpaired,  but  during  1791  he  must 
content  himself  with  the  reduced  rate  of  interest  of 
the  subscriber  to  the  new  loan,  and  yet  remain 
exposed  to  the  insecurity  of  a  precarious  annual 
grant  and  optional  redemption.  Under  such  circum 
stances  it  is  not  strange  that  the  body  of  public  cred 
itors  subscribed  to  the  new  loan,  and  the  funding 
was  a  success. 

The  Sinking  Fund  of  1790. 

On  August  12,  1790,  was  approved  the  act  estab 
lishing  the  first  federal  sinking  fund.  This  provided 
that  the  surplus  revenues  of  1790  from  imports  and 
tonnage  should  be  applied  to  purchases  of  the  public 
debt  at  its  market  price,  if  not  above  par.  The  pur 
chases  were  to  be  made  under  the  direction  of  the 
Yice-President,  Chief  Justice,  Secretary  of  State, 


347]  Sinking  Funds.  37 

Secretary  of  the  Treasury,  and  Attorney  General, 
any  three  of  whom  were  authorized,  with  the  appro 
bation  of  the  President,  to  make  such  purchases  as 
they  should  deem  hest,  provided  these  be  made 
openly  and  with  due  regard  to  the  benefit  of  the  sev 
eral  states. 

The  accounts  of  the  application  of  the  fund,  accom 
panied  by  returns  of  the  amount  of  debt  purchased, 
were  to  be  rendered  at  the  end  of  each  quarter  ;  and 
a  full  and  exact  report  of  the  proceedings  of  the  com 
missioners  was  to  be  laid  before  Congress  within  the 
first  fourteen  days  of  each  session.  The  report 
should  include  a  statement  of  the  disbursements  and 
purchases,  specifying  the  time  when,  prices  at  which, 
and  persons  of  whom  purchases  were  made. 

To  strengthen  the  fund  the  President  was  author 
ized  to  borrow  up  to  §2,000,000,  at  a  rate  not  exceed 
ing  five  per  cent.,  to  be  applied  to  purchases  of  the  debt 
under  the  same  regulations  as  the  surplus  of  1790. 
But,  if  this  was  done,  there  must  be  reserved  annu 
ally  out  of  the  interest  on  the  debt  bought  by  the 
commissioners  a  sum,  not  exceeding  eight  per  cent,  of 
the  sum  borrowed,  to  go  toward  paying  the  interest 
and  sinking  the  principal  of  the  same. 

Early  Operations  on  the  Debt. 

We  have  now  reviewed  legislative  provision  for 
the  debt.  It  remains  to  examine  operations  under 
the  law. 

The  refusal  of  the  government  to  assume  the  bur 
den  of  the  domestic  debt  till  January  1,  1791,  twenty 
months  after  the  inauguration  of  Washington  and 
fifteen  months  after  the  first  real  revenue  began  to 
come  in,  enabled  it  to  apply  the  taxing  power  grad- 


38  Sinking  Funds.  [348 

ually,  and  to  test  each  part  of  the  revenue  machin 
ery,  before  putting  it  to  the  strain  of  providing  for  a 
debt  of  nearly  eighty  millions.  The  interest  for  1790 
on  the  home  debt  was  converted  into  principal.  The 
demands  of  the  foreign  debt  were  met  by  a  new  Hol 
land  loan.1  This  left  a  large  part  of  the  revenues  of 
1790  free  to  fall  as  surplus  into  the  sinking  fund,  and 
be  applied  to  the  purchase  of  certificates.  This  sur 
plus  was  found  to  be  $1,374,656.  Under  a  proviso  of 
the  redemption  act,  a  part  of  this  was  reserved  to 
meet  the  heavy  interest  charges  for  1791.  The 
remainder,  $957,770  was  expended  in  1790  and  the 
following  two  years,  in  buying  up  public  obligations. 

The  first  report  of  the  commissioners  of  the  sink 
ing  fund2  shows  that  they  had  promptly  obeyed  the 
law  by  buying  $278,687  of  debt,  at  the  average  rate 
of  54  cents  on  the  dollar.  Their  second  report3  shows 
that  $1,131,364  of  stock  had  been  bought  for  $699,163, 
an  average  of  62.  This  proves  that  the  sinking  fund 
of  1790  accomplished  its  purpose  of  raising  the  value 
of  government  stock. 

The  desirability  of  this  had  been  urged  by  Hamil 
ton  in  his  "Report  on  the  Public  Credit."4  The  pur 
chase  of  the  public  debt  at  market  prices,  which 
would  be  dishonorable  before  making  provision  for 
the  debt,  would  be  unexceptional  afterward.  Its  effect 
would  be  in  favor  of  the  public  creditors,  as  it  would 
tend  to  raise  the  value  of  stock.  The  government 
would  also  gain  by  the  heavy  discount  at  which  it 
would  secure  its  earlier  purchases.  If  it  should 

'November  12,  1790. 

2  December  21,  1790. 

•November  7,  1791. 

4State  Papers,  Finance,  Vol.  I,  25. 


349]  Sinking  Funds.  39 

decline  to  raise  the  value  of  its  stock,  enormous  pro 
fits  would  be  made  by  speculating  foreigners.  But  if 
the  government  competes  with  speculators,  it  will 
not  only  reap  a  part  of  the  profit  itself,  but  its  pur 
chases  will  contract  their  field  of  operation  and  thus 
lessen  their  profit.  It  will  also  hasten  the  rise  of 
stock,  and  thereby  narrow  the  margin  for  specula 
tion.  Hamilton  further  urged  the  raising  of  money 
by  foreign  loans  for  purchases  of  the  domestic  debt. 
The  growth  of  the  country  demanded  an  injection  of 
foreign  capital  and,  as  the  credit  of  the  government 
was  higher  than  that  of  any  citizen,  this  could  best 
be  done  by  borrowing  abroad  to  pay  off  debt  at  home. 

As  we  have  shown,  the  purchases  of  the  commis 
sioners  raised  the  price  of  stock.  At  the  same  time 
they  vindicated  Hamilton's  judgment  on  other  points. 
The  interest  and  arrears  abroad  were  paid,  we  have 
said,  by  the  proceeds  of  a  new  Holland  loan  for 
§1,200,000.  This  means  that  the  government  bor 
rowed  abroad  that  it  might  pay  its  revenues  for  1790 
to  its  own  citizens.  Enjoying  a  very  high  credit  at 
this  time  in  Amsterdam,  it  created  five  per  cent,  stock 
at  four  and  a-half  premium,  that  it  might  set  free 
funds  to  purchase  six  per  cent,  stock  at  a  discount  of 
thirty  or  thirty-five  per  cent.  It  procured  at  five  per 
cent,  capital  that  enabled  it  to  save  eight  per  cent. 

The  sinking  fund  of  1790  was  not  called  a  sinking 
fund  at  the  time,  and  strictly  speaking,  does  not 
deserve  the  title.  It  was  not  a  permanent  appropri 
ation,  but  a  special  appropriation  of  the  revenues  of 
a  single  year.  It  granted  an  indefinite  surplus  from 
a  specific  source,  not  a  fixed  sum  from  the  general 
income.  As  surplus  it  was  not  inviolable,  seeing  it 
could  be  wiped  out  by  extravagant  legislation.  On 


40  Sinking  Funds. 

the  other  hand,  it  appeared  in  a  separate  account, 
was  under  the  control  of  special  commissioners,  and 
the  income  of  the  fund  could  be  fed  by  loans.  As 
these  loans  required  eight  per  cent,  to  be  set  aside 
annually  for  extinguishing  interest  and  principal,  we 
have  the  complication  of  a  sinking  fund  within  a 
sinking  fund. 

In  his  report1  of  January  23,  1782,  Hamilton,  after 
announcing  the  success  of  the  funding  scheme,  dis 
cusses  the  problem  of  amortization.  The  measures 
already  taken  indicate,  he  thinks,  the  intention  of 
Congress  to  extinguish  the  debt  as  soon  as  possible. 
In  pursuance  of  this  intention  Hamilton  urges  the 
establishment  of  a  real  sinking  fund.  The  basis  of 
such  a  fund  would  be  the  interest  of  such  part  of  the 
debt,  as  should  by  purchase,  payment,  or  otherwise, 
be  acquired  by  the  United  States.  This  basis  would 
be  widened  by  a  saving  about  to  be  effected  in  the 
foreign  debt,  and  by  the  sales  of  public  lands.  Con 
gress  is  therefore  urged  to  adopt  the  principle,  that 
all  interest  that  shall  lapse  be  set  apart  and  appro 
priated,  in  the  most  firm  and  inviolable  manner,  as  a 
fund  for  sinking  the  public  debt.  This  fund  should 
be  placed  under  the  control  of  the  officials  named  for 
the  direction  of  the  former  fund,  and  be  by  them 
applied  to  the  purchase  of  the  debt,  until  the  annual 
income  of  the  fund  shall  equal  two  per  cent,  of  all 
the  six  per  cent,  stock;  thenceforth  to  be  applied  to 
the  redemption  of  the  six  per  cent,  stock.  It  is 
recommended  to  the  consideration  of  Congress 
whether  the  sinking  fund  "ought  not  to  be  so  vested, 
as  to  acquire  the  nature  and  quality  of  a  proprietary 
trust,  incapable  of  being  diverted  without  a  violation 
of  the  principles  and  sanctions  of  property.-9 

1  Finance,   Vol.  J,  p.  146. 


351]  Sinking  Funds.  41 

Changes  Made  by  the  Laiu  of  1792. 
The  report  of  Hamilton  led  to  the  act  of  May  8, 
1792,  making  further  provision  for  the  public  debt. 
This  act  increased  the  funds  in  the  hands  of  the 
commissioners  by  adding  to  the  unexpended  portion 
of  the  surplus  of  1790  two  items: 

1.  All  interest  accruing  on  stock  purchased,  paid 
off,  or  in  any  way  acquired,  by  the  treasury. 

2.  The  unapplied   part    of   all   moneys  appropria 
ted  to  pay  the  interest  on  the  public  debt. 

The  charges  upon  the  yearly  income  of  this  enlarged 
and  progressive  sinking  fund  were  as  follows: 

1.  An  appropriation   of    eight    per  cent,  in    favor 
of  any  loans  made  in  behalf  of  the  sinking  fund. 

2.  Purchases    of   the  various   stocks    in    due    pro 
portions,  unless  the  income  of  the  fund  should  equal 
two  per  cent,  of  the  whole  body  of  outstanding  six 
per  cent,  stock. 

3.  In  that  case  there  should   be  paid    yearly  two 
per  cent,  on  the  outstanding  six  per  cent,  stock. 

4.  If  there  was  any  residue  it  should  be  used  in 
buying  any  remaining  stock. 

All  future  purchases  were  to  be  made  at  the  lowest 
price  in  the  open  market,  or  by  opening  sealed  pro 
posals.  The  commissioners  were  required  to  render 
quarterly  accounts  for  settlement,  and  to  make  a  full 
and  detailed  report  of  their  proceedings  to  Congress 
early  in  each  session. 

The  act  of  1792  introduced  two  features  that  made 
the  redemption  fund  of  1790  a  real  sinking  fund  after 
the  English  model.  It  permitted  the  stock  held  by 
one  branch  of  the  administration  to  draw  interest 
from  the  treasury.  It  pledged  the  interest  inviolably, 
and  thus  bound  the  government  to  a  policy  of  amor- 


42  Sinking  Funds.  [353 

tizing,even  if  compelled  at  the  same  time  to  create  new 
debt  at  higher  interest.  With  all  this  the  sinking 
fund  of  1792  was  far  inferior  in  efficiency  to  that  of 
Pitt,  inasmuch  as,  beyond  the  annual  interest  on 
stock  held,  it  had  no  permanent  appropriation.  The 
British  sinking  fund  of  that  time,  on  the  other  hand, 
received  besides  interest  an  annual  grant  from  the 
treasury  of  one  million  pounds. 

As  the  act  of  1792  made  no  distinct  appropriation 
from  current  revenues  to  the  discharge  of  the  debt, 
the  action  of  the  sinking  fund  was  too  slight  to 
exhibit  results.  The  practical  effect  of  the  new  law 
was  to  add  to  the  redemption  nest-egg — the  surplus 
of  1790 — the  regular  interest  accruing  on  stock  there 
with  purchased.  After  this,  the  reports  of  the  com 
missioners  showed  two  purchases  of  stock — one  with 
money  arising  from  foreign  loans  made  under  the 
act  of  1790,  and  one  with  money  received  as  interest 
under  the  law  of  1792. 

When  the  new  law  passed  into  effect  there  stood  to 
the  credit  of  the  commissioners  government  securities 
to  the  amount  of  si, 456,743.  On  these  there  would 
yearly  accrue  in  interest  £37,465.  The  annual  interest 
account,  therefore,  the  sole  certain  resource  of  the 
sinking  fund,  amounted  then  to  less  than  S38.000, 
while  aside  from  purchases,  actual  redemption  of  the 
debt  could  not  begin  till  the  income  of  the  fund 
reached  two  per  cent,  of  the  outstanding  six  per  cent, 
stock,  that  is,  nearly  8600,000.  At  this  rate,  unless 
greatly  aided  by  the  stubs  of  interest  appropriations, 
the  fund  would  not  really  redeem  any  part  of  the 
debt  within  a  life  time.  So  inadequate  was  the 
sinking  fund  to  do  aught  but  make  occasional  slight 
purchases  of  securities,  that  Congress  at  the  next 


353]  Sinking  Funds.  43 

session    attacked    in    earnest   the   problem   of   debt 
reduction,  and  directed  Hamilton  to  report  a  plan. 

In  December,  1792,  Hamilton  reported  his  plan 
The  surplus  of  present  revenues  should,  he  thought, 
be  devoted  to  contingencies,  to  buying  stock,  or  to 
paying  interest  on  the  deferred  6  per  cents,  when, 
in  1802, they,too, should  begin  drawing  interest.  There 
remain  but  three  methods  of  raising  the  §600,000 
that  constituted  the  two  per  cent,  legally  payable  on 
the  six  per  cent. stock  :  by  loans  alone, by  taxes  alone, 
or  by  a  combination  of  these  two.  The  first  would 
be  nothing  but  conversion  and  would  effect  nothing, 
unless  the  new  loan  could  be  placed  at  a  lower  rate 
than  six  per  cent.  The  second  method  would  put  too 
severe  a  strain  upon  the  revenue  machinery.  The 
third  method,  then,  seemed  the  wisest.  The  combin 
ation  of  loans  and  taxes  might  assume  different 
forms.  Just  sufficient  taxes  might  be  laid  to  meet 
the  interest  on  the  annual  loan  for  redeeming  the  six 
per  cent,  stock,  or  such  taxes  might  be  laid  as  would 
suffice  not  only  to  pay  the  interest,  but  also  to  dis 
charge  the  principal  of  the  loan  within  a  short  and 
definite  term.  The  latter  plan  commended  itself  to 
the  secretary.  Accordingly  he  elaborated  an  exceed 
ingly  complicated  and  intricate  fiscal  apparatus,  by 
which  the  yearly  imposition  of  $100,000  or  more  of 
new  taxes  should  enable  the  government  to  redeem, 
by  1802,  $5,500,000,  and  have  on  hand  at  that  time 
an  annual  fund  of  $1,200,000  for  further  redemption, 
and  for  the  $800,000  of  interest  on  the  deferred  stock 
that  should  begin  in  1802.  The  plan  was  very  ingen 
ious,  but  was  never  favored  by  Congress. 


44  Sinking  Funds.  [354 

Complications. 

An  interesting  chapter  of  politics  arose  out  of  the 
loans  in  behalf  of  the  sinking  fund.  We  have 
already  seen  how,  by  the  two  great  financial  meas 
ures  of  August,  1790,  foreign  loans  to  the  amount  of 
$14,000,000  were  authorized,  812,000,000  to  be  devoted 
to  the  service  of  the  existing  foreign  debt,  and  82,000,- 
000  to  the  purchases  of  the  sinking  fund.  Hamil 
ton  strove  to  keep  these  loans  separate,  but  found  it 
impracticable.  He  therefore  abandoned  the  attempt 
to  keep  the  loans  distinct,  and  issued  stock  upon  the 
general  authority  of  the  two  acts  of  Congress.  Under 
these  acts  there  were  floated  in  Holland,  between 
1790  and  1794,  no  less  than  seven  loans  yielding 
89,400,000  and  payable  in  eleven  to  fifteen  years.  Of 
these  funds  about  three  millions1  crossed  the  Atlan 
tic  and  was  swallowed  up  in  the  expenditures  of  a 
government,  which  had  not  yet  succeeded  in  living 
within  its  income.  The  Indian  war,  the  Whiskey 
rebellion,  the  hostile  attitude  of  England,  and  the 
tribute  to  Algiers  caused  alarming  deficiencies  in  the 
receipts.  Under  these  circumstances  the  large  sums 
drawn  from  abroad,  though  legally  applicable  only 
to  the  purchases  of  the  sinking  fund,  were  withheld 
and  used  for  current  expenses. 

We  find,  therefore,  that  the  results  of  the  sinking 
fund  were  far  inferior  to  what  was  expected  and 
provided  for.  Up  to  April,  1795,  at  which  time  a 
new  sinking  fund  had  been  formed,  there  had  been 
expended  by  the  commissioners  besides  the  8220,203 
of  interest,  that  had  accrued  on  stock  held  by  them, 
only  81  392,072,  being  but  $18,036  more  than  the  sur 
plus  revenue  of  1790,  that  had  constituted  the  nucleus 

1  Hamilton's  "Works,"  Vol.  II,  p.  438. 


355 1  Sinking  Funds.  45 

of  the  former  sinking  fund.  After  every  allowance 
is  made  there  remains  $1,604,252  of  the  fund  brought 
from  abroad  still  unaccounted  for,  so  far  as  the  sink 
ing  fund  is  concerned,  although  the  money  was 
always  brought  in  ostensibly  for  its  use.  It  is  not 
necessary  to  recount  how  the  complications  that 
Hamilton  permitted  to  creep  into  the  accounts  resulted 
in  attacks,  charges,  and  an  investigation.  The  fate 
of  the  loans  on  behalf  of  the  sinking  fund,  however, 
emphasizes  the  fact  that,  despite  the  sinking  fund, 
the  government  was  creating  debt  considerably  faster 
than  it  was  cancelling  debt. 

By  a  statement  of  April,  1795,  it  appears  that  the 
commissioners  had  bought  $2,307,661  of  the  three 
kinds  of  government  stock  with  $1,618,986  of  cash 
—  an  average  price  of  70.  Besides  this  the  commis 
sioners  had  $209,426  of  interest-bearing  certificates 
representing  a  debt  to  French  officers  that  the  treas 
ury  had  paid  off,  $151,640  of  stock  paid  in  by  the 
state  of  Pennsylvania  for  a  tract  of  land  on  Lake 
Erie,  and  $34,753  of  stock  paid  in  by  individuals. 
Altogether  there  was  $2,703,481  of  stock  on  which 
the  commissioners  of  the  sinking  fund  drew  inter 
est  from  the  treasury. 

Before  taking  the  next  step  let  us  pause  and  review 
briefly  the  whole  financial  legislation  from  the  begin 
ning  of  the  government,  as  presented  in  Hamilton's 
final  "Report  on  the  Public  Credit."  He  considers 
it  under  three  heads  : 

1.  The  revenues  established. 

2.  The  provisions  for  funding  the  debt  and  paying 
the  interest. 

3.  The  provisions  for  extinguishing  the  domestic 
debt. 


4G  Sinking  Funds.  [356 

According  to  Hamilton's  resume  the  current  rev 
enues  were  derived  from  imports,  tonnage,  spirits, 
postage,  patent  fees,  dividends  of  bank  stock,  snuff, 
sugar,  auction  sales,  licenses  and  carriages.  Of 
these,  the  first  three  were  permanently  pledged  to 
the  payment  of  interest  on  the  public  debt  as  long  as 
it  should  last.  The  fourth  and  fifth  were  indefinite, 
the  sixth  source  would  remain  as  long  as  the  govern 
ment  owned  bank  stock,  and  the  rest  were  all  tem 
porary,  expiring  with  the  Congress  that  established 
them. 

The  three  permanent  taxes  were  charged  in  regu 
lar  order  with  : 

1.  The  current  expenses  up  to  8600,'000. 

2.  The  interest  on  the  foreign  debt. 

3.  The  interest  on  the  original  domestic  debt  as 
funded. 

4.  The  state  debts  assumed. 

5.  The  balances  to  creditor  states. 

After  satisfying  these  charges  any  surplus  of  the 
duty  011  spirits  was  permanently  appropriated  to  the 
reduction  of  the  debt.  The  surplus  of  the  other  two 
duties  had  no  such  ultimate  appropriation. 

From  the  eight  laws  reviewed  by  Hamilton  it 
appears  that  legislation  had  devoted  to  the  extinction 
of  the  debt: 

1.  The  surplus  of  1790  ($1,374,636). 

2.  The  proceeds  of  all  sales  of  Western  lands. 

3.  A  loan  not  to  exceed  two  millions. 

4.  The  unappropriated  surplus   of   the    duties  on 
spirits. 

5.  The  interest  on  any  government  stock  acquired 
by  the  Treasury — except  8  per  cent,  on  all  sums  bor 
rowed  under  (3). 


357]  Sinking  Funds.  47 

6.  The  surplus  of  any  interest  appropriation. 

7.  Certain  special  appropriations — those,  namely, 
for  that  part  of  the  debt  owed  to  the  United  States 
Bank,  ($1,400,000).     Of  these,  all  but  the  last  item 
were  under  the  control  of  the  commissioners  of  the 
sinking  fund. 

As  we  have  shown,  despite  all  these  elaborate  and 
ambitious  provisions,  very  little  had  been  done. 
Hence,  when  Congress  met  in  the  session  of  1794-5, 
the  conviction  was  general  that  something  really 
effective  must  be  done  to  reduce  the  debt.  The  Pres 
ident,  in  his  address  to  Congress  observed,  that  the 
time  had  come  "for  a  definitive  plan  for  the  redemp 
tion  of  the  Public  Debt."  He  urged  Congress  to 
"consummate  this  work  without  delay.  Nothing  can 
more  promote  the  permanent  welfare  of  the  nation, 
and  nothing  would  be  more  grateful  to  our  constitu 
ents,"  and  "we  ought  to  prevent  that  progressive 
accumulation  of  debt  which  must  ultimately  endanger 
all  governments." 

The  problems  now  confronting  Congress  required: 

(1).  That  the  twenty-seven  millions  of  six  per  cent, 
stock  be  redeemed  at  the  yearly  rate  permitted  by  the 
terms  of  contract,  viz.,  two  dollars  on  every  hundred; 

(2).  That  the  $1,400,000  still  owed  to  the  United 
States  Bank,  due  in  seven  annual  instalments,  be 
paid  as  it  fell  due; 

(3).  That  the  interest  that  should  begin  to  accrue 
in  1801  on  nearly  fifteen  millions  of  deferred  six  per 
cents  be  provided  for; 

(4).  That  in  1802,  after  the  last  instalment  of  the 
bank  debt  had  been  paid,  there  should  begin  the 
redemption  of  this  deferred  stock  at  the  rate  of  two 
per  cent,  annually. 


48  Sinking  Funds.  [358 

Such  was  the  task  to  which  Congress  addressed 
itself.  It  was  unanimously  resolved  to  "put  an  end 
to  that  clamor  which  the  durability  of  the  debt  has 
excited"  by  "making  provision  for  the  reduction  of 
the  debt/'  and  attempting  "honestly  to  provide  an 
efficient  sinking  fund."  It  was  while  engaged  in  this 
task  that  Hamilton,  on  the  eve  of  retirement,  sub 
mitted,  in  perhaps  the  most  brilliant  of  his  state 
papers — his  final  "Report  on  the  Public  Credit'' — a 
skillful  and  elaborate  plan  of  debt  reduction.  So 
able  was  his  review  of  the  situation  and  so  lucid  and 
telling  his  reasoning,  that  his  plan  was  adopted 
almost  without  change,  and  embodied  in  the  act  of 
March  3,  1795. 

The  Sinking  Fund  of  1795. 

This  act  was  a  wide-reaching  measure,  disposing 
of  the  surplus  revenues  of  the  country  for  over  a  quar 
ter  of  a  century,  and  making  final  and  definitive  pro 
vision  for  $46,000,000  of  the  debt, — something  over 
three-fifths  of  the  whole.  It  greatly  enlarged  the 
province  of  the  sinking  fund  commissioners,  and 
made  great  additions  to  their  appropriation,  which 
now  for  the  first  time  received  the  name  of  "Sinking 
Fund." 

The  salient  provisions  of  this  act  were  as  follows: 
It  had  been  from  the  first  the  rule  of  the  custom 
house  to  accept  for  duties  over  fifty  dollars  a  revenue 
bond  running  from  four  to  twenty-four  months.  But 
this  easing  of  importers  by  the  granting  of  credits, 
resulted  in  supplying  the  treasury  with  bonds  instead 
of  cash.  It  therefore  become  necessary  to  anticipate 
the  maturing  of  these  bonds  by  making  short  loans 
from  year  to  year.  This  had  previously  been  within 


359]  Sinking  Funds.  49 

the  province  of  the  Secretary  of  the  Treasury.  By 
the  new  law  the  commissioners  of  the  sinking  fund 
were  empowered  to  borrow  a  sum  not  exceeding 
$100,000  annually,  in  anticipation  of  the  revenue. 
These  loans  were  always  supposed  to  be  made  in 
behalf  of  the  interest  of  the  public  debt,  and  to  anti 
cipate  revenue  devoted  to  that  purpose. 

The  sinking  fund  was  now  enlarged  by  the  follow 
ing  additional  appropriations: 

1.  So  much  of  the  permanent  duties  as,  with  exist 
ing  income,  should  enable  the  commissioners  to  pay, 
in  1796  and  thereafter,  a  yearly  two  per  cent,  of  the 
six  per  cent,  stock.1 

2.  The    surplus     dividends    on    the    government 
$2,000,000  of  United  States  Bank  stock  after  deduct 
ing  the  interest  accruing  on  the  remnant  of  the  bank 
loan. 

3.  So  much  of  the  permanent  duties  as,  with  the 
surplus    dividends,    should    suffice   to  pay   a   yearly 
$200,000  on  the  bank  loan,  till  1802,  and  then  begin 
the  redemption  of  the  deferred  stock. 

4.  The  proceeds  of  the  sale  of  public  lands. 

5.  The   proceeds  of   debts  inherited   from  the  old 
government. 

6.  All  revenue   surpluses  of  any  year  remaining 
unappropriated  during  the  next  session  of  Congress. 

These  appropriations  were  to  continue  until  the 
entire  existing  domestic  debt  of  the  nation,  as  well  as 
loans  in  aid  of  it,  should  be  totally  extinguished. 
The  sinking  fund  thus  constituted  was,  on  the  faith 
of  the  United  States  pledged  and  inviolably  vested, 
in  trust,  in  the  commissioners,  for  the  redemption  of 

xExcept  balances  to  creditor  states.    This  restriction  was  remov 
ed  April,  1796. 
4 


50  Sinking  Funds.  [3GO 

the  public  debt!  Its  resources  could  not  be  diverted 
to  any  other  object  till  the  only  outstanding  debt 
was  the  three  per  cent,  stock.  Then  Congress  might 
use  the  money  as  it  saw  fit. 

The  commissioners  held  the  resources  of  the  sink 
ing  fund  as  a  proprietary  trust  clothed  with  the 
sanctions  of  private  property.  They  superintended 
all  payments  on  behalf  of  the  principal  of  the  debt. 
In  order  that  the  apparatus  for  amortization  might 
be  complete  and  independent  of  external  aid,  the 
commissioners  were  clothed  with  authority  to  make 
loans  needful  for  carrying  out  its  tasks. 

The  act  contained  another  provision  worthy  of 
notice.  Although  heavy  instalments  were  soon  to 
fall  due  on  the  Dutch  debt,  no  authority  was  given 
to  the  commissioners  to  pay  them.  This  was  owing 
to  the  hope  that  the  treasury  might  be  relieved  of 
the  payments  abroad.  This  act  of  1795  ordered  that 
new  stock  be  offered  to  foreign  creditors  in  exchange 
for  the  old.  This  new  stock  bore  interest  one-half 
per  cent,  higher  than  the  old,  and  payable  in  the 
United  States.  The  principal  was  redeemable  at  the 
option  of  the  government.  It  was  confidently  ex 
pected  that  the  plan  of  conversion  would  succeed, 
and  the  treasury  would  thus  be  relieved  sufficiently 
to  carry  out  the  project  of  redeeming  the  home  debt. 

The  sinking  fund  of  1795  was  the  most  rigid  that 
could  be/levised.  The  law  sought  to  fix  the  policy 
in  regard  to  the  debt  for  many  years  to  come.  In 
his  next  report  Secretary  Walcott  observed  that  "As 
the  injunctions  of  the  law  upon  the  commissioners 
of  the  sinking  fund  are  unconditional,  and  as  per 
manent  funds  have  been  invested  and  appropriated, 
it  is  conceived  that  a  successive  reimbursement  annu- 


361]  Sinking  Funds.  51 

ally  of  the  debt  ....  has  become  an  irrevocable 
stipulation  with  the  creditors." 

With  the  close  of  this  review  of  Hamilton's  finan 
cial  system  it  may  be  well  to  inquire  how  far  Hamil 
ton  and  his  party  were  influenced  by  the  erroneous 
ideas  that  at  this  time  ruled  in  English  finance.  It 
is  just  here  that  a  political  controversy  has  raged. 
The  Federalist  writers  have  eagerly  sought  to  show 
that  our  early  fiscal  history  was  uninfluenced  by  a 
theory,  afterwards  so  ignominiously  abandoned. 

Mr.  Henry  C.  Lodge  says  of  the  sinking  fund  : 
This  was  nothing  more  than  the  ordinary  sinking  fund  as  it  is 
used  and  understood  at  the  present  day,  not  only  in  all  civilized 
governments,  but  in  innumerable  corporations.  It  was  merely  a 
plan  for  actual  savings  to  be  applied  to  the  extinction  of  debt.  But 
coming  at  a  time  when  Pitt  used  sinking  fund  as  a  term  to  conjure 
with,  and  by  ingenious  calculations  of  the  rate  of  interest  was  per 
fecting  a  juggle,  which  served  to  blind  a  whole  generation  of  Eng 
lishmen  and  which  actually  led  them  to  believe  that  debts  could 
be  extinguished,  not  by  payment,  but  by  further  borrowing,  this 
arrangement  is  interesting  from  its  business-like  simplicity  and 
sense.  There  was  nothing  of  Pitt's  ingenuity  about  Hamilton's  plan. 
For  him  the  sinking  fund  was  a  convenient  business  device,  noth. 
ing  more.  He  had  too  keen  a  mind  to  be  deceived  himself,  and  he 

had  no  wish  to  corf  use  and  befool  others He  put  forth 

his  scheme  of  funding  and  sinking  not  as  the  incantations  of  an 
enchanter  by  which  debts  could  be  paid  without  saving  but  as  busi 
ness-like  ariangements  .  ,  .  .  1 

This  comparison  of  Pitt  and  Hamilton  seems  hardly 
just  to  the  former.  Pitt's  sinking  fund  was  by  no 
means  the  piece  of  pure  folly  that  people  imagined.  It 
started  with  a  clear  surplus  and,  though  over-intricate, 
would  have  done  well  enough  if  war  had  not  broken 
out  in  1793.  It  was  in  refusing  to  suspend  it  then  that 
the  great  mistake  was  made.  But  this  mistake 
would  not  have  been  made,  had  not  his  sinking 

'Lodge's  "Life  of  Hamilton,"  p.  93. 


5^  Sinking  Funds.  [362 

fund    been    founded  with    wrong    notions    as   to   its 
nature,  and  vain  hopes  as  to  its  effacacy, 

But  there  are  other  errors  besides  those  relating  to 
the  effectiveness  of  a  sinking  fund  at  compound  inter 
est  which  may  lead  to  the  mistake  of  keeping  up  amor 
tization  in  borrowing  times.  Such  a  mistake  may 
quite  as  well  flow  from  over-hasty  solicitude  for  the 
public  credit,  or  from  too  tender  a  care  for  the  lender, 
as  from  the  compound-interest  illusion.  Certain  it 
is,  that  Hamilton  induced  Congress  to  lock  up  the 
revenues  as  securely  as  possible  against  legislative 
discretion,  or  the  demands  of  an  emergency. 

In  his  "Reports,"  Hamilton  recommends  the 
maxim,  that  "the  creation  of  debt  should  always 
be  accompanied  with  the  means  of  extinguishment." 
In  a  note  he  refers  to  Pitt's  one  per  cent,  sinking  fund 
of  1792-98,  and  adds,  "Let  the  United  States  never 
have  to  regret  hereafter  that  they  postponed  too  long 
so  provident  a  precaution."  Further  he  recommends 
an  inviolable  application  of  the  fund,  suggesting  that 
it  be  "clothed  with  the  character  of  private  property" 
and  its  application  be  made  "a  part  of  the  contract 
with  the  creditors."  "Experience  has  shown  .  .  . 
that  a  simple  appropriation  to  the  sinking  fund  is 
not  a  complete  barrier  against  its  being  diverted 
when  immediate  exigencies  press.  This  indicates  the 
utility  of  endeavoring  by  additional  sanctions  to  give 
inviolability  to  the  fund." 

The  sinking  fund  as  "the  essential  basis  of  credit" 
must  be  maintained  even  in  deficit  periods,  for  "the 
emergencies  which  induce  a  diversion  of  the  fund 
are  those  in  which  loans,  and  consequently  credit, 
are  most  needed."  On  this  Professor  H.  C.  Adams 
pithily  remarks:  "It  is  an  error  to  say  that  public 


363J  Sinking  Funds.  53 

credit  is  dependent  upon  maintaining  inviolable  pay 
ments  ;  it  depends  rather  on  simplicity  in  public 
accounts  and  upon  energy,  on  the  part  of  the  admin 
istration,  in  the  prosecution  of  whatever  purpose  it 
undertakes."1 

Mr.  Henry  Adams,  in  his  "Life  of  Gallatin,"  sum 
marizes  Hamilton's  work : 

"Adhering  more  or  less  closely  to  the  English  financial  theories 
then  in  vogue,  he  had  intentionally  constructed  a  somewhat  elabor 
ate  fabric,  of  which  a  considerable  national  debt  was  the  founda 
tion.2  ....  One  of  the  several  English  ideas  adopted  by  Mr. 
Hamilton  from  Mr.  Pitt  was  a  sinking  fund  apparatus.  Even  at 
that  time  of  Mr.  Pitt's  supreme  Authority  it  can  hardly  be  conceived 
that  any  one  really  believed  a  sinking  fund  to  be  effective  so  long 
as  a  government's  expenditure  exceeded  its  income  ;  it  was,  how 
ever,  certainly  the  fashion  to  affect  a  belief  in  its  efficacy  at  all 
times,  and  although,  if  Mr.  Pitt  and  Mr.  Hamilton  had  been  pressed 
on  the  subject,  they  might  perhaps  have  agreed  that  a  sinking  fund 
was  always  expensive  and  never  efficient  except  when  there  was  a 
surplus,  they  would  in  the  end  have  fallen  back  on  the  theory  that 
it  inspired  confidence  in  ultimate  payment  of  the  debt.  Their 
opponents  would  not  unnaturally  consider  it  to  be  a  mere  fraud 
designed  to  cover  and  conceal  the  true  situation.3  .  .  *.  .  In  theory 
Mr.  Hamilton  also  was  in  favor  of  discharging  the  debt,  and  origi 
nated  the  machinery  for  doing  so  ;  that  is  to  say,  he  originated  the 
sinking  fund  machinery,  or  rather  borrowed  it  from  Mr.  Pitt, 
although  this  financial  juggle  has  now  become,  both  in  England  and 
America,  a  monument  of  folly  rather  than  of  wisdom."4 

Gallatin  criticized  "the  mystifying  and  useless 
machinery,  with  which  Mr.  Hamilton,  had  in  imitation 
of  Mr.  Pitt,  encumbered  the  very  simple  subject  of 
paying  the  debt,"  and  declared  that  the  appropria 
tions  subsequent  to  1795  "do  not  seem  to  have  pro 
duced  any  other  effect  than  that  of  rendering  still 
more  complex  a  system  in  its  nature  sufficiently 

^'Public  Debts",  p.  265. 
2 "Life  of  Gallatin",  p.  167. 
3 "Life  of  Gallatin",  p.  173. 
4"Lifeof  Gallatin",  p.  171. 


54  Sinking  fund*.  L364 

intricate."  Upon  the  strength  of  Gallatiivs  criticism 
Randolph,  in  a  report  of  the  ways  and  means  com 
mittee,  alleged  that  "no  effectual  provision  for  the 
final  redemption  of  the  whole  present  debt  of  the 
United  States  does  at  this  time  exist,"  and  added  the 
sneer,  "To  the  measures  which  have  already  been 
adopted  in  relation  to  this  subject,  their  complexity 
forms  an  objection  inferior  only  to  their  insuf 
ficiency." 

With  the  weight  of  authority  backing  up  conclu 
sion  from  the  facts  it  would  seem  no  longer  possible 
to  deny  that  our  early  finance  was  too  much  influ 
enced  by  English  precedent. 

Let  us  see  what  grounds  there  were,  in  1802,  for 
Gallatin's  severe  criticism  upon  the  structure  reared 
by  the  hands  of  Hamilton.  The  main  object  of  the 
law  of  1795  was  to  secure  the  regular  payment  of  the 
six  per  cent,  and  deferred  stocks.  By  this  law  they 
were  virtually  converted  into  a  terminable  eight  per 
cent,  annuity,  expiring  in  twenty-three  years  from 
the  first  payment.  Agreeably  to  this  idea  no  dis 
tinction  was  made  between  the  interest  account  and 
that  of  the  principal.  The  regular  dividend  of  1| 
per  cent,  on  the  nominal  capital  was  paid  on  the  last 
day  of  March,  June  and  September,  and  3£  per  cent, 
on  the  last  day  of  each  year. 

To  liberate  the  revenue  for  this  purpose  it  was  the 
intent  of  the  law,  as  we  have  seen,  to  convert  the 
Dutch  debt  into  home  debt  by  offering  an  increase  of 
i  per  cent,  in  the  rate  of  interest.  By  this  operation 
would  be  made  optional  the  redemption  of  over  £14,- 
000,000  then  approaching  maturity,  and  the  amor 
tization  of  the  6  per  cents,  could  proceed  according 
to  plan. 


36 5 J  Sinking  Funds.  55 

The  efforts  of  Wolcott  to  convert  the  balance  of 
the  debt  to  France  were  successful,  and  $1,84$, 900 
of  5  per  cent,  stock,  and  $176,000  of  4  per  cent,  stock 
were  converted  into  equal  amounts  of  domestic  stock, 
known  as  the  "5i's"  and  «4^'s"  of  1795.  The 
rest  of  the  foreign  debt  was  due  to  the  Dutch  capi 
talists  in  Amsterdam  and  Antwerp.  These  declined 
to  exchange  their  nearly  matured  stock  for  new 
domestic  debt,  so  the  project  failed.  Thus  the  first 
defect  in  the  plan  of  1795  was,  that  the  government 
found  itself  compelled  to  provide,  according  to  con 
tract,  for  the  payment  during  the  next  fifteen  years 
of  $12,200,000  not  contemplated  in  the  plan. 

Another  unforeseen  difficulty  arose  in  1796.  We 
have  seen  that  the  sinking  fund  was  charged  for 
seven  years  with  an  annual  $200,000  on  account  of 
the  subscription  loan  from  the  United  States  Bank. 
But  there  were  other  bank  loans  unprovided  for, 
viz.,  temporary  loans  in  anticipation  of  the  revenue 
tied  up  in  revenue  bonds.  These  were  of  three  kinds: 
loans  for  current  expenses,  loans  by  the  commission 
ers  for  the  interest  on  the  public  debt,  and  loans, 
funded  on  the  revenues,  for  specific  purposes,  such 
as  the  Indian  war,  the  ransom  and  tribute  to  Algiers, 
and  the  Whiskey  insurrection.  For  most  of  these 
loans  were  pledged  the  actual  revenues  of  the  current 
year,  when  they  should  fall  due  the  next  year.  But 
as  next  year's  taxes  were  likewise  tied  up  from  next 
year's  needs,  the  pledged  taxes,  when  they  finally  did 
reach  the  treasury,  were  all  absorbed  in  current 
expenses.  So  the  temporary  bank  loans  once  made 
were  constantly  renewed,  until,  on  January  1,  1796, 
they  amounted  to  $6,200,000.  As  by  its  heavy 
accommodations  ($6,000,000)  the  United  States  Bank 


66  Sinking  Funds.  [366 

had  parted  with  two-thirds  of  its  capital,  and  seri 
ously  crippled  its  operations,  it  pressed  for  payment 
of  its  loans  as  they  fell  due.  Thus  one  year  after 
"  permanent  and  effective  provision  "  had  been  made 
for  the  debts  of  the  United  States,  the  commission 
ers  were  embarassed  by  a  call  for  $400,000  from  Hol 
land,  and  one  for  $4,600,000  from  the  United  States 
Bank.  These  constituted  an  unlooked-for  demand  of 
$5,000,000. 

To  meet  the  emergency  the  commissioners  were 
authorized  to  borrow  to  the  extent  of  $5,000,000. 
For  this  they  were  to  issue  funded  6  per  cent,  stock, 
not  redeemable  before  1819.  For  its  redemption 
were  pledged  the  funds  to  be  released  by  the  extinc 
tion  of  the  old  6  per  cent,  stock  in  1818.  In  case 
they  saw  fit  the  commissioners  were  allowed  as  a 
final  resource  to  sell  the  shares  of  the  United  States 
Bank,  held  by  the  government. 

The  delay  of  an  opposition  Congress,  both  in  lay 
ing  new  taxes  and  in  funding  the  floating  debt,  had 
greatly  injured  the  credit  of  the  country.  When  the 
commissioners  essayed  to  place  the  $5,000,000  loan 
the  stock  found  few  purchasers  and  the  attempt 
proved  abortive.  The  market  was  already  loaded 
with  stock,  and  after  several  months  only  $80,000 
had  been  taken,  for  which  $70,000  was  received. 

Finally  part  of  the  United  States  Bank  stock  held 
by  the  government  was  sold.  This  was  a  serious 
invasion  of  the  sinking  fund,  seeing  that  one  of  its 
resources  was  dividend  on  bank  stock.  Hamilton 
denounced  it  as  an  infatuated  step,  and  a  fatal  inva 
sion  of  the  system  for  paying  the  debt.  Wolcott, 
too,  opposed  it,  but  necessity  compelled.  Accord 
ingly  2,780  $400-sharesof  bank  stock  were  sold  at  25 


367]  Sinking  Funds.  57 

per  cent,  premium,  yielding  $1,384,260.  This  sum 
afforded  such  relief  as  permitted  a  postponement  of 
the  balance,  which  was  subsequently  paid  out  of 
current  revenues.  As  to  the  $400,000  due  Holland, 
the  government  was  enabled  to  pay  it  by  an  unex 
pected  increase  of  the  revenue. 

By  these  means  the  commissioners  were  tided  over 
the  difficulties  of  1796.  But  the  experience  had 
served  to  show  the  defects  in  the  system,  and  in  his 
report  of  December,  1796,  Secretary  Wolcott  called 
for  an  additional  yearly  million  and  a  quarter  to 
carry  out  the  plan  of  redeeming  the  debt.  He  sug 
gested  a  direct  tax  on  the  states,  but  the  proposal 
was  rejected,  and  Congress  laid  additional  duties  for 
the  payment  of  the  Dutch  debt  and  the  bank  loans. 
At  the  same  time,  an  act  was  passed  authorizing 
the  receipt  of  evidences  of  public  debt  in  payment  of 
land  in  the  Northwest. 

Though  these  measures  were  inadequate,  the  year 
3797  was  a  prosperous  year,  and  $1,627,414  of  the 
regular  revenues  was  expended  in  reducing  the  debt. 
Had  it  not  been  for  the  defensive  measures  occa 
sioned  by  the  hostile  attitude  of  France,  the  great 
era  of  debt  payment  might  have  dated  from  this 
year  instead  of  from  1801. 

Likewise  in  1798  the  revenues  were  prolific,  and 
with  ordinary  expenditures  there  would  have  been  a 
large  surplus  for  the  debt.  But  the  war  appropria 
tions  obliterated  this  margin  and  went  far  beyond. 
It  was  decided  to  lay  a  direct  tax  of  $2,000,000  on  the 
states,  and  the  President  was  authorized  to  raise  a 
tax -loan  of  two  millions  in  anticipation  of  this 
amount.  Another  loan  for  $5,000,000  was  authorized 
reimbursable  after  fifteen  years.  For  its  service  was 


58  Sinking  Funds.  [368 

pledged  the  surplus  of  import  and  tonnage  duties 
beyond  the  permanent  appropriation  charged  thereon, 
and  the  faith  of  the  United  States  was  pledged  to 
make  up  any  deficiency.  The  President  was  further 
more  authorized  to  add  vessels  to  the  navy  and  issue 
as  payment  six  per  cent,  stock  redeemable  at  pleasure. 
By  this  authority  there  was  issued  in  1799,  $711,700 
of  this  stock,  known  in  our  financial  history  as  the 
"navy  six  per  cents." 

When  the  $5,000,000  loan  came  to  be  filled,  it  was 
found  that  the  traditional  rate  of  six  per  cent,  was 
too  low  for  placement  at  par.  Accordingly  eight  per 
cent,  was  offered  and  the  loan  was  filled  at  this  rate. 
But  this  brought  to  light  the  danger  lurking  in  Ham 
ilton's  policy  of  rigid  amortization.  The  very  year 
the  eight  per  cent,  stock  was  issued,  the  commis 
sioners  expended  $038,000  on  behalf  of  the  principal 
of  the  six  per  cents.  The  interest  loss  occasioned  by 
this  one  amortization  was  therefore  $12,760  a  year 
during  the  whole  period  of  the  eight  per  cents.  A 
similar  loss  would  be  shown  on  each  of  the  subse 
quent  payments  that  redeemed  6  per  cents,  when 
8  per  cents  might  have  been  amortized. 

On  February  28,  1800,  the  committee  on  ways 
and  means  announced  a  probable  deficit  for  that 
year  of  $3,500,000.  A  new  loan  for  this  amount  was 
accordingly  recommended.  In  a  later  report  the 
committee  brought  forward  a  plan  for  sinking  this 
loan  and  the  $5,000,000  loan  of  the  preceding  year. 
At  eight  per  cent,  the  annual  interest  charge  would 
be  $680,000.  Besides  this  there  should  be  provided  a 
sinking  fund  sufficient  for  a  yearly  payment  of  two 
per  cent,  on  the  principal.  This  would  call  for 
$170,000.  As  the  term  of  the  $5,000,000  loan,  how- 


369]  Sinking  Funds.  59 

ever,  forbade  any  reimbursement  for  ten  years,  it  was 
proposed  to  apply  the  annuity  for  ten  years  to  the 
general  purchase  of  the  public  debt.  The  plan,  there 
fore,  contemplated  a  sinking  fund  payment  of  $170,000 
for  ten  years,  and  then  a  ten  per  cent,  annuity  term 
inable  in  fourteen  years.  This  extreme  anxiety  to 
begin  amortizing  a  loan  at  its  very  creation  shows 
the  influence  of  Pitt's  sinking  fund  of  1792. 

In  accordance  with  these  recommendations  Con 
gress  authorized  a  loan  for  $3,500,000,  reimbursable 
after  fifteen  years.  Under  this  authority  $1,481,700 
of  eight  per  cent,  stock  was  issued,  for  which  was 
received  $1,565,229,  being  a  premium  of  $83,529,  or 
nearly  five  and  three-quarters  per  cent.  Thus,  as 
will  be  explained  in  Chapter  III,1  the  annual  interest 
included  a  small  sinking  fund  payment.  To  raise  the 
annual  $850,000  planned  by  the  committee,  additional 
revenues  to  that  amount  were  provided  by  the  reve 
nue  act  of  May  13, 1800,  and  were  exclusively  appro 
priated  to  the  discharging  of  the  interest  and  princi 
pal  of  the  public  debt  "heretofore  contracted,  or  to  be 
contracted,  during  the  present  year." 

This  closes  the  chapter  of  Federalist  financiering. 
Our  next  task  is  to  show  how  the  Federalist  system 
was  criticised  and  mended  by  financiers  of  another 
school. 

The  year  1801  saw  the  consummation  of  a  political 
revolution  that  established  in  power  a  party  pledged 
to  the  payment  of  the  debt.  Jefferson  later  declared 
that  his  administration  made  all  other  objects  subor 
dinate  to  this,  and  his  finance  minister,  Gallatin, 
replied  that  "the  reduction  of  the  debt  was  certainly 
the  principal  object  in  bringing  me  into  office." 

JPage  101. 

2Adarns'  "Life  of  Gallatin",  p.  270. 


60  Sinking  Funds.  [370 

The  new  secretary  brought  to  his  task  views  dif 
ferent  from  those  heretofore  ruling  in  our  financial 
policy.  The  divergence  appears  clearly  in  the  debate 
of  January,  1800.  In  a  passage  alluding  to  England, 
Mr.  Harper  said: 

"Her  present  minister,  at  the  commencement  of  his  administra 
tion  in  1783,  established  a  permanent  sinking  fund,  which  now  pro 
duces  very  great  effects;  he  also  introduced  a  maxim  of  infinite 
importance  in  finance  which  he  has  steadily  adhered  to,  that  when 
ever  a  new  loan  is  made  the  means  shall  be  provided  not  only  of 
paying  the  interest,  but  of  effecting  a  gradual  extinction  of  the 
principal."  ....  "These  ideas,  profiling  by  the  example  of 
England,  we  have  adopted  and  are  now  practicing  on.  We  have 
provided  a  fund  which  is  now  in  constant  operation,  for  the  extin 
guishment  of  our  debt.  This  fund  will  extinguish  the  foreign  debt 
in  nine  years  from  now,  and  the  six  per  cent.,  a  large  part  of  our 
domestic  debt,  in  eighteen  years.  I  trust  we  shall  adhere  to  this 
plan,  and  whenever  we  are  compelled  by  the  exigency  of  our  affairs 
to  make  a  loan,  by  providing  also  for  its  timely  extinguishment, 
we  may  always  avoid  an  inconvenient  or  burdensome  accumulation 
of  debt." 

Mr.  Gallatin,  in  reply,  laid  down  a  principle  not 
acknowledged  by  English  statesmen  till  Hamilton's 
expose  in  1813. 

.  .  .  .  "I  know  but  one  way  that  a  nation  has  of  paying  her 
debts,  and  that  is  precisely  the  same  which  individuals  practice, 
'spend  less  than  you  receive,'  and  you  may  then  apply  the  surplus 
of  your  receipts  to  the  discharge  of  your  debts.  But  if  you  spend 
more  than  you  receive,  you  may  have  recourse  to  sinking  funds, 
you  may  modify  them  as  you  please,  you  may  render  your  accounts 
extremely  complex,  you  may  give  a  scientific  appearance  to  additions 
and  substractions,  you  must  still  necessarily  increase  your  debt.  If 
you  spend  more  than  you  receive,  the  difference  must  be  supplied 
by  loans;  and  if  out  of  these  receipts  you  have  set  a  sum  apart  to 
pay  your  debts,  if  you  have  so  mortgaged  or  disposed  of  that  sum 
that  you  cannot  apply  it  to  your  useful  expenditure,  you  must  bor 
row  so  much  more  in  order  to  meet  your  expenditure.  If  your 
revenue  is  nine  millions  of  dollars  and  your  expenditure  fourteen, 
you  must  borrow,  you  must  create  a  new  debt  of  five  millions. 
But  if  two  millions  of  that  revenue  are,  under  the  name  of  sink 
ing  fund,  applicable  to  the  payment  of  the  principal  of  an  old 


371]  Sinking  Funds.  Gl 

debt,  and  pledged  for  it,  then  the  portion  of  your  current  revenues 
applicable  to  discharging  your  current  expenditures  of  fourteen 
millions  is  reduced  to  seven  millions;  and  instead  of  borrowing 
live  millions  you  must  borrow  seven;  you  create  a  new  debt  of 
seven  millions,  and  you  pay  an  old  debt  of  two.  It  is  still  the  same 
increase  of  rive  millions  of  debt.  The  only  difference  that  is  pro 
duced  arises  from  the  relative  price  you  pay  for  the  old  debt  and 
the  rate  of  interest  you  pay  for  the  new.  At  present  we  pay  yearly 
a  part  of  a  domestic  debt  bearing  six  per  cent,  interest,  and  of  a  for 
eign  debt  bearing  four  or  five  per  cent,  interest;  and  we  may  pay 
both  of  them  at  par.  At  the  same  time  we  are  obliged  to  borrow  at 
the  rate  of  eight  per  cent.  At  present,  therefore,  that  nominal 
sinking  fund  increases  our  debt,  or  at  least  the  annual  interest 
payable  on  our  debt."1  .... 

It  may  be  asked  why,  if  Gallatin  saw  through  the 
sinking  fund  illusion,  did  he  adopt  the  sinking  fund 
machinery  into  his  system  ?  The  answer  is  given  in 
his  own  words.  He  says  of  debt  payment  : 

"As  to  the  forms  adopted  for  attaining  that  object,  they  are  of 
quite  subordinate  importance.  Mr.*Hamilton  adopted  those  which 
had  been  introduced  in  England  by  Mr.  Pitt,  the  apparatus  of  com 
missioners  of  the  sinking  fund,  in  whom  were  vested  the  redeemed 
portion  of  the  debt,  which  I  considered  as  entirely  useless,  but 
could  not  as  Secretary  of  the  Treasury  attack  in  front,  as  they  were 
viewed  as  a  check  on  that  officer,  and  because,  owing  to  the  preju 
dices  of  the  time,  the  attempt  would  have  been  represented  as 
impairing  the  plan  already  adopted  for  the  payment  of  the  debt.  I 
only  tried  to  simplify  the  forms,  and  this  was  the  object  of  my  let 
ter2  to  the  committee  on  the  ways  and  means.  The  injury  which 
Mr.  Pitt's  plan  did  was  to  divert  public  attention  from  the  only  pos 
sible  mode  of  paying  a  debt,  viz.,  a  surplus  of  receipts  over  expen 
ditures,  and  to  inspire  the  absurd  belief  that  there  was  some  mys 
terious  property  attached  to  a  sinking  fund  which  would  enable  a 
nation  to  pay  a  debt  without  the  sine  qua  non  condition  of  a  sur 
plus But  the  only  injury  done  here  by  the  provinions 

respecting  the  commissioners  of  the  sinking  fund,  and  by  certain 
specific  appropriations  connected  with  the  subject,  was  to  render  it 
more  complex,  and  to  make  the  accounts  of  the  public  debt  less  per 
spicuous  and  intelligible.  Substantially  they  did  neither  good  nor 
harm.  The  payments  for  the  public  debt  and  its  redemption  were 

Adams'  Gallatin,  p.  229. 
2Finance,  Vol.  I,  p.  746. 


62  Sinking  Funds.  [372 

not  in  the  slightest  degree  affected,  either  one  way  or  the  other, 
by  the  existence  of  the  commissioners  of  the  sinking  fund,  or  by 
the  repeal  of  the  laws  in  reference  to  them.  The  laws  making 
permanent  appropriations  were  much  more  important.  Even  with 
respect  to  these  it  is  obvious  that  they  must  also  have  become  nuga 
tory  whenever  the  expenditure  exceeded  the  income.  Still  they 
were  undoubtedly  useful  by  their  tendency  to  check  the  public 
expenses."1 

So  much  for  criticism  of  general  policy.  In  his 
above  mentioned  letter  Gallatin  presented  the  case 
against  the  existing  situation. 

There  existed  at  this  time  as  a  vested  and  inviolable 
fund  only  the  appropriations  of  March  3,  1795.  This 
fund  provided  regularly  for  an  eight  per  cent,  annuity 
on  the  six  per  cent,  stock.  After  this  payment  had 
been  taken  out  there  remained  for  the  Dutch  debt, 
four  and  a  half  per  cent,  stock,  five  and  a  half  per 
cent,  stock,  880,000  of  six  per  <?ent.  stock,  and  bank 
loans,  only  the  surplus  of  revenues  and  the  receipts 
from  public  lands.  The  former  had  so  far  yielded 
nothing  and  could  not  be  looked  upon  as  a  sure  and 
inviolable  source,  as  long  as  Congress  had  power 
utterly  to  defeat  this  provision  by  heavy  appropria 
tions  for  other  objects.  The  latter  item, estimated  at 
8400,000  a  year,  though  applicable  to  any  part  of  the 
public  debt  (except  the  eight  per  cent,  stock  and  navy 
sixes)  not  already  provided  for, was  totally  inadequate 
even  for  the  Dutch  debt.  It  is  true  additional  duties 
had  been  imposed  in  1797  for  these  purposes,  but  they 
would  not  yield  over  $500,000  yearly,  while  for  six 
years  yet,  the  Dutch  debt  alone  would  require  an 
average  .of  81,000,000.  Without  better  provision  the 
Dutch  instalments  would  continue,  in  the  future,  as 
in  the  past,  to  be  paid  hap-hazard  and  without 
authority. 

'Adams'  Gallatin,  p.  296. 


373]  Sinking  Funds.  63 

There  were  in  fact  several  enactments,  since  1795, 
providing  for  the  Dutch  debt,  the  bank  loans,  and 
the  $7,271,900  of  new  stock,  but  this  supplementary 
legislation  was  not  engrafted  upon  the  original  plan. 
The  auxiliary  resources  were  not  a  part  of  the  sink 
ing  fund,  were  not  vested  in  the  commissioners,  nor 
pledged  on  the  faith  of  the  United  States,  and  were, 
therefore,  repealable  at  will  of  Congress  without 
breach  of  contract  with  the  public  creditors.  Such, 
legislation,  thought  Gallatin,  could  not  be  held  to  be 
part  of  a  permanent  provision  for  redeeming  the  pub 
lic  debt.  Moreover,  these  appropriations,  not  being 
accompanied  by  an  imperative  clause  directing  pay 
ment,  enjoyed  no  priority  over  appropriations  for 
current  expenses.  All  alike  rested  on  moneys  in  the 
treasury,  and,  if  any  must  go  unsatisfied,  the  choice 
lay  with  the  Secretary  of  the  Treasury.  A  hostile 
secretary  might  favor  other  appropriations  and  thus 
defeat  the  provision  made  by  Congress  for  the 
redemption  of  the  debt.  In  view  of  these  facts  Sec 
retary  Gallatin  pronounced  the  existing  provisions 
for  the  public  debt  not  only  intricate,  difficult  of  exe 
cution,  uncertain  in  amount,  and  dependent  on  the 
will  of  the  legislature,  but  even  inadequate  and 
precarious. 

The  Sinking  Fund  of  1802. 

To  remedy  these  defects  Gallatin  made  recom 
mendations  which  were  embodied  in  the  law  of  April 
29,  1802.  The  object  of  this  law  was  to  make  as 
secure  a  provision  for  the  whole  public  debt,  as  the 
law  of  1795  had  made  for  the  six  per  cent,  and 
deferred  stocks.  It  reorganized  the  sinking  fund 
by  adding  to  it  :  (1)  The  funds  appropriated  for  inter- 


64  Sinking  Funds.  [374 

est  on  the  debt ;  (2)  enough  of  the  revenues  to  bring 
the  whole  up  to  $7,300,000. 

An  annual  payment  of  $7,300,000  was  vested  in 
the  commissioners  of  the  sinking  fund  for  the  entire 
debt  service.  All  payments  on  account  of  the  debt 
in  the  way  of  interest,  contingent  charges,  or  reim 
bursement,  were  under  the  superintendence  of  the 
commissioners.  These  were  to  be  made  in  the  fol 
lowing  order  : 

First,  Those  payable  from  the  old   sinking  fund. 

Second,  The  interest  and  charges  on  the  present 
debt,  or  on  future  loans  on  behalf  of  the  debt. 

Third,  Instalments  due  on  existing  debt. 

Fourth,  Purchases  of  existing  debt. 

The  commissioners  were  empowered  to  distribute 
the  burden  of  the  Dutch  debt  more  evenly  over  the 
eight  years  following  by  short  reloans,  and  were 
directed  to  apply  the  sum  thereby  disengaged  to 
redeeming  the  domestic  debt. 

This,  then,  is  the  gist  of  the  enactment.  After 
repealing  the  obnoxious  internal  duties,  the  annual 
revenue  was  estimated  at  $9,950,000.  The  annual 
expenses,  with  close  economy,  were  put  at  $2,650,000. 
This  left  $7,300,000.  This  was  but  little  above  the 
$7,000,000  actually  required  for  the  years  1802-3-4, 
when  the  heaviest  instalments  of  the  Dutch 
debt  were  to  fall  due.  A  like  sum,  though  not 
required,  could  still  be  profitably  applied  until  the 
year  1810,  by  paying  off  minor  stocks  such  as  the 
four  and  a-half's,  five  and  a-half's,  navy  sixes,  bank 
loans,  and  eight's.  After  1810  so  large  a  sinking 
fund  could  be  used  only  by  buying  three's  on  the 
market.  The  law  of  1802,  then,  signified  the  resolve 
to  continue  the  burden  required  for  the  next  three 


375]  Sinking  Funds.  65 

years,  until  the  national  debt  should  be  fully  paid. 
But  it  signified  more.  In  1802,  under  the  existing 
law  there  would  eventually  have  been  carried  to  the 
sinking  fund  a  clear  surplus  of  81,200,000.  And  so, 
perhaps,  for  succeeding  years.  But  this  annual  sur 
plus  was,  as  we  have  seen,  a  precarious  thing  afford 
ing  no  security  to  the  public  creditor,  because  contin 
gent  upon  government  expenses.  This  uncertainty 
the  law  of  1802  remedied  by  anticipating  the  surplus, 
and  setting  it  apart  to  the  sinking  fund  in  advance 
of  all  budgetary  appropriations.1  Hereafter  all  pay 
ments  for  the  debt  up  to  $7,300,000  were  to  enjoy  a 
priority  over  current  expenditures.  The  government 
must  support  itself  on  the  leavings  of  the  sinking 
fund. 

The  act  of  1802  was  strictly  supplementary  to  the 
plan  of  amortization  adopted  in  1795.  It  simplified 
the  existing  system  by  rolling  into  one  the  batch  of 
special  assets;  it  enlarged  it  by  adding  about  $1,200,- 
000  to  its  certain  income;  it  modified  it  by  turning 
the  interest  appropriations  into  the  sinking  fund,  at 
the  same  time  charging  that  fund  with  the  entire 
debt  service.  But  not  a  single  resource  of  the  old 
fund  was  deranged  or  altered.2 

Owing  to  the  productiveness  of  the  revenues,  the 
redemption  of  the  debt  was  not  checked  by  the  neces 
sity  of  providing  for  the  $11,250,000  of  six  per  cent, 
stock  created  for  the  Louisiana  purchase.  The  sink 
ing  fund  was,  in  1804,  enlarged  to  $8,000,000  and 
charged  with  $700,000  of  new  interest. 

irrhe  civil  list,  however,  had  always  a  first  lien   on  the  revenue 
for  $600,000. 

2This  same  year  one  of  the  items  constituting  the  old  sinking 
fund  lapsed,  owing  to  sale  of  the  bank  stock. 
5 


66  Sinking  Funds.  [376 

In  180G,  owing  to  certain  abuses  in  the  land  offices, 
Congress  repealed  the  old  device  of  raising  the  value 
of  government  stocks  by  accepting  them  in  payment 
for  public  land.  At  the  same  time  the  sinking  fund 
commissioners  were  freed  from  certain  hampering 
restrictions  regarding  time  and  manner  of  purchas 
ing  the  public  debt,  while  the  limiting  par  value  of 
three  per  cents  was  fixed  at  sixty. 

From  1802  the  revenues  constantly  exceeded 
estimates,  and,  with  an  overflowing  treasury,  the 
payment  of  the  debt  proceeded  with  unprecedented 
rapidity.  The  eight  million  sinking  fund  was  further 
enlarged  by  surpluses,  so  that  the  payments  on  the 
principal  of  the  debt  rose  from  about  £3,207,000  in 
1804,  to  83,905,000  in  1805;  to  $4,828,000  in  1806;  to 
83,729,000  in  1807;  and  to  86,986,000  in  1808.  It  was 
accordingly  recommended  byGallatin,  and  authorized 
by  the  act  of  February  11, 1807,  that  the  unredeemed 
portion  of  the  sixes,  existing  in  the  form  of  eight  per 
cent,  annuities,  be  exchanged  for  a  common  six  per 
cent,  stock,  redeemable  at  will.  The  three  per  cents 
also  were  to  be  converted  at  sixty-five  into  similar 
stock.  The  object  of  this  scheme  was  to  enable  the 
sinking  fund  to  continue  its  amortization  without  too 
free  a  resort  to  the  stock  market.  The  operation  was 
only  partially  successful.  80,294,051.12  of  "ex 
changed  sixes"  were  issued,  but  only  811,859,850.70 
of  the  "converted  sixes."  Later,  as  we  shall  see,  a 
similar  attempt  was  made,  but  with  a  different 
purpose. 

The  Embargo,  the  Non-Importation  Act,  and  the 
disturbance  of  commerce  by  foreign  restrictions, 
shrunk  the  receipts  frightfully  in  1808,  1809,  and 
1810.  It  was  even  found  necessary,  in  order  to 


377]  Sinking  Funds.  67 

maintain  the  sinking  fund  intact,  to  authorize,  in 
1810,  a  temporary  loan  from  the  United  States  Bank 
of  $2,750,000.  The  debt  made  and  the  debt  paid  were 
both  at  six  per  cent.,  so  the  transaction  was  merely 
nominal.  The  new  debt  was  charged  upon  the  sink 
ing  fund,  and  was  paid  off  the  next  year.  The  oper 
ation  was  in  effect  a  partial  suspension  of  amortiza 
tion  for  one  year. 

In  his  report  at  the  close  of  1811,  Gallatin  reviews 
the  amortization  since  1801.  As  the  treasury  was 
now  closing  a  debt-paying  period  and  entering  upon 
a  debt-creating  period,  it  may  be  well  to  look  back 
over  the  fiscal  operations,  and  note  what  impression 
had  been  made  on  the  debt.  The  inherited  debt  and 
accrued  interest  to  1791  amounted,  when  funded,  to 
876,781,953.14.  The  Federalists  in  ten  years  reduced 
this  to  $72,733,599,  but  added  $7,193,400  of  new  stock, 
mostly  at  eight  per  cent.,  thus  bequeathing  a  burden 
of  $79,926,999  to  their  successors.  Of  this,  Gallatin' s 
sinking  fund  extinguished  $46,022,810  between  1801 
and  1811.  The  purchase  of  Louisiana,  however, 
added  $11,250,000  to  the  principal,  so  that  on  January 
1,  1812,  the  public  debt  was  $45,154,189,  over  thirty- 
one  millions  less  than  the  original  Revolutionary 
debt. 

In  1801  there  were  twelve  species  of  stock  outstand 
ing.  Eleven  years  later  there  were  only  five  kinds  at 
two  rates  of  interest,  viz.:  three  per  cent,  and  six  per 
cent.  From  1801  to  1812,  the  regular  application  of 
$8,000,000  to  the  debt  had  been  threatened,  first  with 
dearth  of  redeemable  stock,  and  later  with  dearth  of 
revenue,  but  each  crisis  had  been  met,  so  that  the 
operations  of  the  sinking  fund  had  continued  unin 
terrupted.  The  debt  yet  outstanding  consisted 


68  Sinking  Funds.  [378 

chiefly  of  the  eight  per  cent,  annuities,  the  practically 
irredeemable  three's,  and  the  Louisiana  stock  not 
payable  till  1818.  If  no  more  debt  were  created, 
there  could  be  applied  yearly  till  1818  only  $3,792,382 
all  told.  The  remaining  £4,200,000  of  the  sinking 
fund  was  not  applicable  to  the  debt,  unless  public 
stock  fell  below  a  certain  par  fixed  by  the  act  of 
1806.  As  long  as  this  untoward  event  did  not  occur, 
the  surplus  of  the  sinking  fund  was,  by  the  law  of 
1802,  available  for  current  expenses.  Should  it  occur, 
the  government  would  be  obliged  to  revert  to  the 
costly  practice  of  buying  stock  and  placing  stock  in 
the  same  market  at  the  same  time. 

The  Sinking  Fund  during  the   War. 

The  war  measures  of  1812  included  a  loan  of  eleven 
millions  charged  upon  the  sinking  fund,  an  issue  of 
treasury  notes  at  five  and  two-fifths  per  cent,  interest 
constituting  a  secondary  charge  on  the  sinking  fund, 
and  a  project  to  release  the  sinking  fund  from  the 
$1,570,000  annually  due  on  the  principal  of  the  eight 
per  cent,  annuities.  As  formerly,  so  now,  the  idea 
was  to  convert  the  unpaid  principal  of  these  annui 
ties  into  six  per  cent,  stock.  Had  the  project  suc 
ceeded  the  emancipation  of  the  sinking  fund  from  the 
old  debt  would  have  been  complete.  As  it  was  only 
about  three  millions  were  exchanged,  that  is,  less 
than  one-fifth  of  the  whole. 

There  was  paid  out  of  the  sinking  fund  during 
1812  $4,710,954.39,  of  which  $2,259,681  was  applied 
to  principal  of  debt.  The  balance  of  the  eight  million 
appropriation  was  applicable  to  the  demands  of  the 
next  year.  In  1813  there  was  paid  out  on  account  of 
the  sinking  fund  over  eleven  millions,  used  mainly 


379]  Sinking  Funds.  69 

for  redemption  of  treasury  notes,  repayment  of  tem 
porary  loans,  and  interest  on  the  new  war  loans. 
Purchases  of  stock  amounting  to  $412,497  were  also 
made.  In  1814  the  sum  expended  for  old  debt, 
interest  of  new  debt,  temporary  loans,  and  treasury 
notes,  was  §8,386,880.  Of  this,  not  over  $1,475,000 
was  in  payment  of  old  debt.  The  sinking  fund,  then, 
may  be  reckoned  to  have  cost  the  government  very 
little  during  the  war,  thanks  to  the  happy  device  of 
charging  upon  the  sinking  fund  each  year  the  pay 
ment  of  some  millions  of  treasury  notes  and  temporary 
loans.  On  this  matter  Professor  H.  C.  Adams 
remarks: 

"  During  the  continuance  of  the  war  there  was  no 
redemption  of  permanent  indebtedness,  except  such 
as  had  been  entailed  by  the  law  of  1795.  We  find, 
in  the  financial  administration  of  this  war,  no  appli 
cation  of  the  pernicious  theory  that  every  loan 
should  be  accompanied  by  the  means  of  its  own 
extinction."1 

Meanwhile,  war  debt  was  being  rapidly  piled  up 
on  the  sinking  fund.  On  December  31,  1815,  the 
debt  was  estimated  as  follows  : 

Old  debt  remaining $  39,905,183.66 

Funded  war  debt 49,780,322.13 

Treasury  notes 18,452,800.00 

Temporary  loans 550,000.00 

Total  burden  on  the  sinking  fund §108,688,305.79 

The  sinking  fund  was  at  that  time  composed  of 

Interest  on  stock  held  by  commissioners,  §1,969,577.64 

Receipts  from  the  public  lands 800,000.00 

From  duties 5,230,422.36 


Sinking  fund $8,000,000, 00: 

1  "Public  Debts,"  p.  268. 
2 Finance,  Vol.  II.,  p.  916. 


70  Sinking  Funds.  [380 

On  September  30,  1815,  the  total  burden  on  the 
sinking  fund  had  increased  to  $119,635,558.46. 

All  the  loan  acts  of  the  war  had  contained  a  para 
graph  directing  the  commissioners  to  pay  the  interest 
and  reimburse  the  principal  when  due,  and  to  pur 
chase  the  stock  at  or  below  par  whenever  they  should 
see  fit.  The  faith  of  the  United  States  was  invaria 
bly  pledged  to  make  up  any  deficiency  in  the  appro 
priation  for  the  debt.  Owing  to  great  financial  stress 
and  general  failure  of  loans,  the  loan  act  of  Novem 
ber  15,  1814,  in  addition  to  the  above,  gave  the 
further  assurance  that  special  funds  would  be  added 
to  the  sinking  fund  appropriation,  during  that  ses 
sion  of  Congress,  for  the  loan  then  authorized,  and 
that  the  sinking  fund  would  be  permanently  in 
creased,  so  as  to  extinguish  the  public  debt. 

Reorganization. 

At  the  close  of  the  war,  it  was  evident  to  all  that 
a  sinking  fund  of  88,000,000  could  never  support  the 
funded  debt  and,  at  the  same  time,  discharge  punc 
tually  the  whole  principal  and  interest  of  annual 
issues  of  treasury  notes,  amounting  to  eight  or  nine 
million  dollars.  The  vigorous  head  of  the  treasury, 
therefore,  proposed  : 

First — That  the  sinking  fund  be  relieved  of  the 
treasury  note  debt  by  funding  the  notes; 

Second — That  the  sinking  fund  be  applied  first  to 
paying  the  old  eight  per  cent,  annuity; 

Third — That  it  be  applied  next  to  discharge  of  the 
temporary  loans  of  the  war; 

Fourth— That  it  be.  applied  then  to  the  interest  on 
the  war  loans; 

Fifth — That  the  surplus  be  applied  in  purchasing 
the  war  debt. 


381]  Sinking  Funds.  71 

In  the  matter  of  funding  the  treasury  note  debt, 
Congress  followed  Dallas'  advice.  The  act  of 
March  3,  1815,  authorized  a  loan  of  $18,452,800,- 
that  being  the  sum  required  to  cover  the  outstanding 
notes.  Under  this  authority,  a  loan  for  twelve 
millions  was  opened.  Six  per  cent,  stock  to  the 
amount  of  $12,288,147.56  was  issued,  which  sufficed 
to  absorb  about  $11,700,000  of  treasury  notes. 

In  his  report  of  December,  1815,  Dallas  estimated 
that,  with  treasury  notes  and  temporary  loans  out  of 
the  way,  the  regular  charge  on  the  sinking  fund  for 
interest  and  obligatory  reimbursement  of  the  old 
debt  would  be  $7,660,000.  This  left  only  $340,000 
annually  applicable  to  the  principal  of  the  new  war 
debt.  This  scale  of  reduction  was  evidently  incom 
mensurate  with  the  national  ability.  So  greatly  had 
the  debt  risen  that,  in  order  to  provide  for  it  as 
generously  as  Gallatin's  sinking  fund  of  eight  mil 
lions  had  provided  for  the  eighty-five  million  debt  of 
1804,  the  annual  appropriation  must  be  increased  to 
$10,500,000.  Dallas,  however,  proposed  to  add  but 
two  millions  to  the  existing  appropriation.  The 
sinking  fund  thus  reorganized  would  extinguish  the 
public  debt  in  about  eighteen  years. 

A  year  later,  Secretary  Crawford  urged  similar 
measures  upon  Congress.  On  these  recommenda 
tions,  the  committee  of  ways  and  means  submitted 
a  report  on  January  14,  1817.  They  observed  that 
the  reorganization  of  the  sinking  fund  had  been 
deferred  till  the  revenue  system  should  receive  a 
permanent  form,  and  the  peace  footing  should  be 
determined.  Meanwhile,  no  time  had  been  lost,  for 
the  surplus  revenues  had  been  used  in  reducing  the 
floating  debt  (arrearages  of  military  expense),  and  re- 


72  Sinking  Funds.  [382 

tiring  the  unfunded  treasury  notes.  Including  these 
classes  of  debt,  the  sum  applied  to  amortization 
^during  1816  was  no  less  than  824,000,000,  while  a 
balance  of  ten  millions  remained  in  the  treasury. 
The  overflowing  revenue,  which  made  possible  so 
large  a  reduction  in  one  year  demonstrated,  to  the 
satisfaction  of  the  committee,  that  the  resources  of 
the  nation  were  ample  to  effect  within  a  reasonable 
length  of  time  the  extinguishment  of  the  whole  debt. 

"As  the  numerous  and  often  incongruous  pro 
visions  of  the  present  laws  in  relation  to  the  sinking 
fund  require  a  general  revision,"  the  committee 
reported  certain  propositions.  They  recommended  a 
permanent  sinking  fund  appropriation  of  810,000,000, 
and  proposed  also  an  additional  special  appropriation 
for  1817  of  80,000,000,  together  with  §4,000,000  more, 
to  be  considered  as  an  advance  on  account  of  the 
regular  payment  of  the  succeeding  year.  This  was 
in  view  of  the  ample  revenues  of  1817,  and  of  the 
fact  that  there  is  a  disadvantage  in  keeping  idle  in 
the  treasury  money  destined  to  pay  the  principal  of 
a  debt.  The  committee  urged  the  further  appropri 
ation  to  the  sinking  fund  of  all  surpluses  above 
$2,000,000. 

In  adding  to  the  amount  of  the  sinking  fund,  it 
appeared  wise  to  simplify  its  operations.  There  was 
then  standing  on  the  books  of  the  treasury  and 
credited  to  commissioners  of  the  sinking  fund 
nearly  834,000,000  of  stock  of  fourteen  different 
descriptions,  and  bearing  seven  different  rates  of  in 
terest.  On  this  stock  interest  was  supposed  regularly 
to  accrue  and  to  be  paid,  with  no  other  effect  than 
that  of  adding  to  the  labors  of  those  who  wished 
to  understand  the  accounts  of  the  government.  The 


383J  Sinking  Funds.  73 

committee  proposed,  therefore,  that  all  certificates 
of  public  debt,  when  redeemed,  should  be  destroyed. 
It  is  true  the  proposed  change  would  not  effect  the 
diminution  of  the  debt,  but  "if  the  saving  of  trouble 
in  making  up  the  accounts  be  nothing,  it  is  yet  im 
portant  that  their  state  be  such  as  to  admit  of  being 
easily  and  generally  understood,  and  that  what  is  in 
itself  plain  should  not  be  obscured  by  the  introduc 
tion  of  a  useless  fiction." 

The  Sinking  Fund  of  1817. 

The  bill  reported  by  the  committee  was  passed. 
By  the  act  of  March  3,  1817,  the  government — after 
having  withdrawn  its  circulating  notes,  liquidated 
its  floating  indebtedness,  revised  the  revenue  system 
and  fixed  the  peace  establishment — redeemed  the 
promise  given  in  the  loan  acts  of  the  war.  This 
time  the  reorganization  of  the  sinking  fund  was 
far  more  radical  than  any  former  change.  The  first 
clause  of  the  act  repealed  all  previous  acts  of  Con 
gress  making  provision  for  the  service  of  the  debt. 
All  the  other  enlargements  had  kept  the  existing 
fund  as  a  nucleus  and  built  up  around  it  a  new  fund 
by  additional  appropriations1.  This  act  was  the  first 
act  that  swept  away  all  previous  make-up  of  the 
fund,  and  started  with  clear  ground.  It  simply 
vested  in  the  commissioners,  for  the  service  of  the 
debt,  an  annual  sum  of  ten  millions  from  the  perma 
nent  revenues  of  the  government — import  duties, 
internal  taxes  and  public  land  sales.  In  addition  to 
this  fixed  payment,  there  was  appropriated  for  1817 
a  sum  of  nine  millions  and,  if  deemed  expedient  by 
the  Secretary  of  the  Treasury,  a  further  sum  of 
four  millions  on  the  payment  of  1818.  Furthermore, 


74  Sinking  Funds.  [384 

any  yearly  surplus  above  two  millions  was  to  be  paid 
over  to  the  commissioners. 

The  application  of  the  sinking  fund  thus  rehabili 
tated  was  to  conform  to  the  previous  engagements 
with  the  public  creditors.  When  in  any  year  the 
sinking  fund  should  exceed  the  sum  directly  appli 
cable  to  the  service  of  the  debt,  the  surplus  should 
be  applied  to  the  purchase  of  stock  at  the  market 
price,  providing  it  did  not  exceed  the  following  : 
for  threes  05,  for  sixes  par,  for  sevens  no  higher  in 
proportion  than  for  the  sixes.  In  time  of  war  any 
surplus,  beyond  the  payments  on  account  of  the  debt 
called  for  by  the  public  engagements,  might  be 
applied  to  the  public  service. 

The  act,  furthermore,  directed  that  all  the  accum 
ulated  certificates  of  stock,  as  well  as  those  there 
after  to  be  acquired,  were  to  be  cancelled  or  destroyed, 
and  "no  interest  was  to  be-considered  as  accruing  on 
them." 

In  the  redemption  plan  of  1817  the  sinking  fund 
reaches  almost  the  extreme  of  simplicity.  It  is  true 
the  payment  on  behalf  of  the  public  debt  still  went 
to  a  separate  account,  and  was  payable  in  theory  to 
a  special  board.  But  the  cunning  and  complicated 
apparatus  of  Hamilton  and  the  English  financiers 
had  been  done  away  with.  There  was  no  fixed  pay 
ment  on  account  of  the  principal  of  the  debt,  no 
inviolable  appropriation,  no  sinking  fund  composed 
of  specific  items  of  revenue,  no  contract  with  the 
creditors,  no  automatic  purchasing  machinery,  no 
borrowing  on  behalf  of  the  fund,  no  hoarding  of  paid 
off  debt,  and  no  payment  of  interest  thereon.  Sim 
plicity  and  common  sense  had  triumphed. 


385]  Sinking  Funds.  75 

Unlike  the  earlier  enactments  of  that  of  1817  con 
tained  no  limitation  to  existing  debt,  such  as  had  so 
often  spoiled  the  plans  of  redemption.  The  new  sink 
ing  fund  was  not,  however,  applicable  to  the  service 
of  all  the  public  indebtedness.  Besides  the  tempor 
ary  loans  and  treasury  notes  charged  upon  other 
appropriations,  there  were  $7,000,000  of  five  per 
cent,  stock  exchanged  for  shares  of  the  new  United 
States  Bank,  of  which  the  interest  and  principal 
would  be  more  than  defrayed,  it  was  estimated,  by 
the  dividends,  or  by  the  sale  of  the  shares  ;  and  over 
four  millions  of  non-interest  bearing  Mississippi 
stock,  issued  to  meet  the  Yazoo  claims,  and  charged 
upon  the  receipts  from  Mississippi  lands.  This  left 
the  burden  on  the  sinking  fund  about  one  hundred 
and  ten  millions.  + 

The  history  of  the  sinking  fund  of  1817  is  not 
eventful.  During  1817  there  was  applied  to  the  debt 
$25,423,036.12,  and  in  1818  $21,296,306.04.  But  dur 
ing  the  years  following  the  sum  applied  to  the  debt, 
owing  to  the  reaction  from  the  prosperity  of  1816,  fell 
short  by  nearly  twelve  millions  of  the  amount  appro 
priated  by  law.  The  total  deficiency  of  $3,000,000 
for  the  first  seven  years  was  made  up  in  following 
years.  This  deficiency  was,  however,  partly  due  to 
the  fact  that  most  of  the  debt  was  not  yet  reimbursa 
ble,  the  twelve-year  term  of  the  war  loans  being  yet 
unexpired.  The  application  of  money  to  the  d^ebt 
was,  however,  furthered  by  a  clause  in  the  bank 
act  of  1816.  This  provided  that  $21,000,000  of  the 
capital  stock  of  the  United  States  Bank  might  be 
subscribed  in  public  stock,  which  the  government 
should  have  the  privilege  of  buying  of  the  bank  at 
the  rate  permitted  by  law. 


?G  Sinking  Funds.  [386 

In  the  years  1825-1828  the  war  debt  fell  due.  In 
1822  and  the  years  following  three  attempts  had 
been  made  to  refund  a  part  of  this  debt  at  a  lower 
rate,  in  order  to  save  interest  and  to  distribute  the 
burden  of  payment  of  the  four  years  over  the  three 
following  years,  when  no  part  of  the  debt  fell  due. 
The  attempts  failed  almost  entirely,  because  the  rate 
of  interest  (four  and  a-half  per  cent.)  offered  by  the 
government  was  too  low.  As  the  debt  was  not  thus 
distributed,  the  government  adopted  the  plan  of 
partial  payments.  From  1825  the  redemption  of  the 
debt  proceeded  with  great  rapidity,  so  that  by  the 
close  of  1834  the  whole  mass  was  practically  extin 
guished.  Small  amounts  of  stock  were  still  out 
standing,  but  their  payment  was  provided  for.  The 
duties  of  the  commissioners  of  the  sinking  fund 
ceased,  and  the  Secretary  of  the  Treasury  was  charged 
with  further  payments  on  account  of  the  debt. 

This  closes  our  chapter  of  experience  with  a  per 
manent  commission.  Invented  in  an  era  of  personal 
government,  cabinet  intrigue,  and  limited  publicity, 
as  a  visible  and  imposing  sign  that  the  public  faith 
was  beyond  the  whim  of  a  minister  or  the  cavil  of  a 
creditor,  it  had  no  place  or  use  in  the  system  we 
developed.  It  was  but  a  needless  administrative 
appendix  that,  once  imported,  continued  with  us  only 
by%  sufferance,  and  that  a  later  debt  epoch  has  not 
revived.  With  the  modern  budget  and  monthly 
debt  statement,  it  needs  no  special  board  with  sep 
arate  accounts  to  enable  the  public  to  follow  the 
course  of  amortization. 

Debt  Payment  Between  1837  and  1862. 
Between  1837  and  1862  lies  a  period  of  little  fiscal 
interest,  separating  by  a  quarter  of  a  century  the 


387]  Sinking  Funds,  77 

two  great  debt-paying  epochs  of  our  history.  This 
period  exhibits  a  series  of  fluctuations  of  expense, 
revenue  and  debt,  too  rapid  to  permit  striking  into 
any  settled  policy,  such  as  prevailed  during  the 
eleven  years  after  1801  or  the  seventeen  years  fol 
lowing  1817. 

After  the  crash  of  1837  constant  deficits  led  the  gov 
ernment  to  issue  treasury  notes.  Nothing  was  done 
for  their  redemption,  so  they  were  annually  paid  by 
new  issues.  At  last  these  piled  up  till,  in  1841,  Con 
gress  was  forced  to  fund  them,  and  thus  found  a  new 
public  debt.  As  usual,  the  faith  of  the  United  States 
was  pledged  to  the  redemption  of  the  new  bonds.  The 
next  year  the  loan  was  extended  and  enlarged,  and 
based  in  the  old-fashioned  way.  So  much  of  the 
import  duties  as  should  be  necessary  were  pledged  to 
pay  the  interest  and  redeem  the  stock.  Under  these 
acts  $21,000,000  of  funded  debt  were  created. 

When,  in  1844,  prosperity  returned  and  a  surplus 
appeared  in  the  treasury,  Secretary  Bibb  came  for 
ward  with  a  plan  for  a  sinking  fund.  From  the  midst 
of  an  extraordinary  mass  of  platitudes,  Bibb  declares 
that  excess  of  revenue  above  expenditure  is  the  only 
real  sinking  fund,  and  that  "the  lessening  of  expense 
and  the  increase  of  revenue  are  the  only  means  by 
which  the  sinking  fund  can  be  enlarged."  After 
reviewing  the  history  of  our  former  debt  payment,  he 
suggests  on  annual  appropriation  of  two  millions  for 
the  debt  service.  At  the  same  time,  owing  to  the 
uncertain  yield  of  the  revenues,  he  favors  the  setting 
aside  of  casual  surpluses  rather  than  a  fixed  sum,  and 
recommends  the  establishment  of  a  sinking  fund 
commission.  The  chief  loans  were  to  fall  due  in  1853 
and  1863.  The  secretary,  therefore,  wants  a  sinking 


>  Sinking  Funds.  [388 

fund  adquate  to  pay  the  interest,  "to  purchase  so 
much  in  each  year  of  the  principal,  as  shall  be  offered 
for  sale  at  reasonable  rates  for  certificates  of  stock, 
and  to  amount,  in  the  succession  of  years  which  must 
elapse  before  they  will  be  redeemable  by  the  terms  of 
contracts,  to  a  sufficiency  to  pay  the  principal  when 
the  time  for  redemption  shall  arrive."  The  fault  may 
lie  in  the  syntax,  but  at  first  blush  this  sentence  would 
seem  to  show  that  the  secretary  did  not  understand 
how  uniform  is  the  action  of  a  combined  sinking  fund. 

With  the  advent  of  the  Mexican  war  came  a  new 
growth  of  debt.  The  loan  act  of  1847  authorized 
the  issue  of  twenty-three  millions  of  twenty-year 
stock.  To  the  service  of  this  loan  were  pledged  the 
proceeds  of  all  sales  of  public  lands  after  January  1, 
1848.  The  balance  left  after  paying  interest  was  to 
be  used  in  buying  bonds  at  their  market  value,  if  not 
above  par.  For  purchase  of  the  sixteen  million  loan 
of  the  next  year  the  Secretary  of  the  Treasury  was 
authorized  to  use  any  surplus  funds. 

The  excess  from  the  sale  of  public  lands  set  apart 
for  reducing  the  stock  of  1847,  could  not  be  used  in 
buying  stock  above  par.  As  the  market  price  was 
above  par,  the  funds  had  to  lie  idle  in  the  treasury. 
Secretary  Walker,  therefore,  sought  and  obtained 
authority  to  purchase  at  a  premium.  This  was  found, 
however,  a  dear  way  of  sinking  the  debt.  During 
1851  and  1852  the  average  price  paid  for  government 
bonds  was  113,  and  the  total  sum  expended  in  pre 
miums  was  over  8300,000.  The  Secretary  of  the 
Treasury  accordingly  suggested  that,  besides  letting 
the  surplus  accumulate  in  the  treasury,  or  buying 
stock  with  it  at  113,  there  was  still  the  third  alterna 
tive  of  investing  it  in  sound  state  securities,  and 


389J  Sinking  Funds.  79 

holding  them  as  a  sinking  fund  until  the  government 
could  redeem  its  stock  at  par.  Congress  mindful  of 
the  fate  of  the  Smithsonian  fund  declined  to  risk  the 
public  money  in  state  bonds. 

The  Sinking  Fund  of  1862. 

With  the  outbreak  of  the  Civil  war  begins  the  final 
period  of  sinking  fund  history.  In  the  earlier  part 
of  this  period  we  find  a  return  to  Hamiltonian  princi 
ples.  Secretary  Chase  in  his  report  of  July  4,  1861, 
advocated  the  immediate  establishment  of  a  sinking 
fund  for  the  expungement  of  the  war  loans.  The 
fruit  of  his  policy  was  the  clause  in  the  act  of 
February  25,  1862. 

This  act,  after  authorizing  a  serious  appeal  to 
credit,  undertook  to  establish  the  debt  on  a  secure 
basis.  The  coin  paid  for  duties  on  imports  was  to  be 
applied,  first,  to  the  payment  of  interest  on  the  bonds 
and  notes  of  the  United  Stats.  It  was  then  to  be 
applied  "to  the  purchase  or  payment  of  one  per 
centum  of  the  entire  debt  ....  to  be  made  within 
each  fiscal  year,  which  is  to  be  set  apart  as  a  sinking 
fund,  and  the  interest  of  which  shall  in  like  manner 
be  applied"  ....  The  residue  of  customs  receipts 
was  to  be  paid  into  the  treasury.  The  language  of 
this  act  is  plain.  The  provision  was  made  part  of 
a  loan  act  and  was  to  apply  to  future  as  well  as  to 
existing  debt.  In  view  of  this,  the  words  of  a  writer 
in  the  Bankers^  Magazine  seem  warranted. 

"It  was  a  formal  notice  to  all  persons,  who  should 
loan  to  the  government,  of  its  future  intention,  and 
constitutes  a  contract  as  binding  as  any  can  be  made 
between  it  and  the  persons  who  have  loaned  to  the 
government  since  that  date."1 
0>  P-  725. 


UNIVERSITY 


80  Sinking  Funds.  [390 

Notwithstanding  the  law  of  1802,  there  was  no 
compliance  with  its  sinking  fund  provision  during 
the  war.  At  the  close  Secretary  McCulloh,  who 
resembled  Gallatin  as  Chase  resembled  Hamilton, 
ignored1  the  law  of  18(52  and  proposed  a  sinking  fund 
similar  to  that  of  1817.  He  estimated  that  a  yearly 
appropriation  to  the  debt  of  §200,000,000  would 
discharge  the  whole  in  about  thirty  years.  The 
proposal  was  not  accepted,  and  during  his  adminstra- 
tion  the  treasury  applied  to  the  debt  whatever  funds 
were  available,  without  reference  to  the  sinking 
fund.  As  the  actual  reduction  was  far  greater  than 
that  required  by  law,  nobody  complained. 

The  sinking  fund  provision  of  1862  seems  to  have 
been  discovered  by  Secretary  Boutwell.  In  his  first 
report  he  announced  that  he  had  purchased  twenty 
millions  of  bonds  for  the  sinking  fund.  He  had 
made  further  purchases,  which  he  held  as  a  special 
fund  subject  to  the  action  of  Congress.  He  recom 
mended  that  such  extra  purchases  be  added  to  the 
sinking  fund  until  it  equalled  what  it  would  have 
been,  if  the  law  had  been  complied  with  from  the  first. 

In  the  great  funding  act  of  July  14,  1870,  reor 
ganizing  the  public  debt,  it  was  provided  that  all 
bonds  applied  to  the  sinking  fund  be  recorded,  can 
celled,  and  destroyed,  and  that  a  sum  equal  to  the 
interest  on  all  bonds  belonging  to  the  sinking  fund, 
be  included  in  the  yearly  amortization.  Heretofore 
the  heads  of  the  treasury  had  bought  bonds,  even 
beyond  the  requirement  of  the  sinking  fund.  This 
action  was  legalized  by  a  clause  authorizing  the 
secretary  to  redeem  the  five-twenties  with  any  coin 
which  he  might  lawfully  apply  to  that  purpose. 

'Repoit  of  1863. 


391]  Sinking  Funds.  81 

In  1873  the  great  crisis  dried  up  the  sources  of 
revenue  seriously  and  made  it  impossible  to  meet  all 
claims  upon  the  receipts.  It  is  possible  that,  if  Sec 
retary  Boutwell  had  been  in  office,  there  would  have 
been  a  rigid  adherence  to  the  strict  letter  of  the  law 
of  1862.  Under  Secretary  Bristow  the  law  was  prac 
tically  construed  to  suit  the  emergency.  It  was 
announced  that  for  1874-5  there  would  be  a  surplus 
revenue  of  nine  millions  to  be  applied  to  the  sinking 
fund.  As  under  law  over  thirty-one  millions  was 
required  for  the  fund,  there  would  be  a  deficiency 
for  the  year  of  over  twenty-two  millions.  This  was 
making  the  sinking  fund  the  residuary  legatee  of 
the  revenues. 

In  his  report  for  1875  Secretary  Bristow  acknowl 
edged  that  the  sinking  fund  payment  was  secondary 
only  to  the  interest  on  the  public  debt,  and  took 
precedence  of  all  other  appropriations.  As  some  had 
asserted  that  the  excess  payments  of  former  years 
excused  the  lapse  of  the  sinking  fund  payment  when 
need  arose,  the  secretary  took  occasion  to  declare 
that  the  statute  imposed  a  duty  to  be  performed 
annually,  and  that  purchases  must  be  made  within 
each  fiscal  year.  The  secretary  explained  the  cessa 
tion  of  bond  purchases  by  the  fact  that  bonds  could 
not  be  bought  at  par,  while  he  was  forbidden  by  law 
to  pay  more.  This  dead-lock,  however,  had  been 
broken  by  the  law  of  March  3,  1875,  which  author 
ized  the  secretary  to  obtain  bonds  for  the  sinking 
fund  by  calling  in  and  redeeming  the  five-twenties. 

As  the  deficiency  in  the  revenues  continued,  the 
next  secretary,  Morrill,  thought  fit  to  present  a  view 
of  the  operations  of  the  debt  in  toto.  From  his  cal- 


0 


82  Sinking  Funds.  [392 

dilations  he  concluded  that  the  public  creditor  had 
no  ground  of  complaint. 

"The  terms  of  the  law  of  February  25,  1862, 
required  that  by  the  operations  of  the  sinking  fund 
account,  the  public  debt  should  be  reduced  in  the 
sum  of  $433,848,215,37  between  July  1,  1862,  and 
the  close  of  the  last  fiscal  year.  A  reduction  has 
been  effected  during  that  period  of  $656,992,226.44, 
or  8223,144,011.07  more  than  was  absolutely  required. 

"It  can  therefore  be  said,  as  a  matter  of  fact,  that 
all  of  the  pledges  and  obligations  of  the  government 
to  make  provision  for  the  sinking  fund  and  the  can 
cellation  of  the  public  debt  have  been  fully  met  and 
carried  out/' 

Liberal  Interpretation. 

The  sinking  fund  first  rose  into  prominence  dur 
ing  the  preparations  for  specie  resumption.  The  act 
of  1875  permitted  the  sale  of  bonds,  to  procure  the 
stock  of  gold  necessary  for  resumption.  A  compli 
ance  with  the  letter  of  the  statutes  would  lead  to  the 
practice  of  redeeming  and  borrowing  at  the  same 
time.  Sound  finance  required  that,  in  such  a  case, 
the  government  should  cease  buying  bonds  for  the 
sinking  fund,  and  let  the  cash  destined  for  that 
purpose  accumulate  in  the  treasury,  awaiting  the 
day  of  resumption.  It  was  accordingly  urged,  and 
with  reason,  that  the  claims  of  the  sinking  fund 
should  be  suspended. 

This    was  not  done,   but    something   similar   was 
done.     The  debt  to  which  a  yearly  one  per  cent,  pay 
ment  was  pledged  included  notes  as  well  as  bonds. 
It  might,  therefore,  he  held  lawful  to  redeem  green- 
deport  of  1876. 


393]  Sinking  Funds.  83 

backs,  or  even  "shinplasters,"  for  the  sinking  fund, 
in  place  of  bonds,  and  thereby  lesson  the  mass  of 
paper  to  be  confronted  on  January  1,  1879.  Accord 
ingly  under  the  law  or  April  17,  1876,  $7,000,000  of 
fractional  currency  were  credited  to  the  sinking 
fund  at  five  per  cent,  interest.  Similarly  $8,000,000 
of  greenbacks  were  added  under  a  clause  in  the 
resumption  act. 

Since  the  accession  of  Senator  Sherman  to  the 
treasury  portfolio  a  construction  of  the  laws  of  1862 
has  prevailed  which,  however  consonant  with  com 
mon  sense  and  sound  finance,  is  irreconcilable  with 
the  theory  that  the  sinking  fund  then  established  is 
part  of  the  contract  with  the  public  creditors.  In 
his  report  for  1879  the  secretary  said  :  "These  acts 
(of  1862  and  1870)  are  regarded  as  imposing  upon 
the  secretary  the  duty  of  providing  for  the  sinking 
fund  out  of  the  surplus  revenues  of  the  govern 
ment."  The  new  construction  was  very  apparent  in 
a  Senate  debate,  in  1884,  over  a  proposition  to  reduce 
the  sinking  fund.  Senator  Plumb  regarded  the 
sinking  fund  as  merely  a  matter  of  bookkeeping. 
"  The  sinking  fund  has  simply  been  some 
thing  represented  by  certain  entries  on  the  books  of 
the  treasury,  but  nothing  in  the  vaults  of  the  treas 
ury." 

Senator  Sherman  stated  that,  in  1873  and  there 
after,  the  government  did  not  pay  one-fourth  or  one- 
fifth  of  the  sinking  fund.  In  1877  and  the  follow 
ing  years,  surpluses  appeared  and  much  more  was 
paid  than  the  sinking  fund  required.  The  question, 
then,  is,  Has  the  United  States,  which  has  pledged 
its  faith  to  pay  a  certain  sum  annually,  a  right  to 
apply  the  excess  payment  of  one  year  to  make  up  the 


84  Sinking  F^mds.  [394 

deficiency  of  another  year  ?  The  senator  regarded 
it  as  a  compliance  with  the  law  when  the  govern 
ment  does  substantially  what  it  agreed  to  do.  No 
man  could  question  the  faith  of  the  United  States 
because  it  was  for  three  or  four  years  unable  from 
its  current  revenues  to  pay  the  sinking  fund,  pro 
vided  it  has,  on  the  whole,  more  than  made  good  its 
promise.  But  while  the  senator  regarded  the  sink 
ing  fund  payment  as  justly  amenable  to  the  financial 
demands  of  the  country,  he  deemed  it  inconsistent 
with  honor  and  public  faith  to  alter  or  invade  the 
sinking  fund  by  law.  Temporary  exigency  might 
suspend  amortization  without  dishonor,  but  conscious 
policy  never. 

Conclusions. 

Our  conclusion,  then,  is  that  the  debt  has  been 
reduced,  but  not  with  the  steadiness  and  automatic 
regularity  contemplated  by  the  terms  of  the  law  of 
1862.  Though  the  total  reduction  has  exceeded  the 
requirements  of  the  law,  yet  so  sensitive  have  the 
yearly  appropriations  been  to  the  condition  of  the 
treasury,  that  it  is  doubtful  if  they  could  have  con 
formed  more  closely  to  the  varying  financial  situa 
tion,  had  there  been  no  law  at  all. 

What  the  secretaries  have  done — and  they  could 
do  no  more — was  simply  to  amortize  with  the  annual 
surplus,  be  it  large  or  small.  It  is  hard  to  see,  there 
fore,  wherein  our  sinking  fund  law,  thus  adminis 
tered,  differs  in  effect  from  a  law  directing  the  sec 
retary  to  use  surplus  funds  to  pay  the  debt.  If 
Congress  had  ordered  the  law  to  be  administered  so 
that  the  sinking  fund  appropriation  should  enjoy  a 
priority  over  other  appropriations,  not  permanent,  or 


395]  Sinking  Funds.  85 

regular,  the  law  would  have  meant  something.  In 
that  case  a  shrinkage  in  the  revenues  would  have 
meant  a  deficiency  in  the  funds  for  public  works, 
and  not  in  the  funds  for  the  public  debt.  We  should 
not  then  be  placed  in  the  anomalous  position  of 
granting  to  gratuitous  appropriations  like  those  of  the 
river  and  harbor  bill,  the  preference  at  the  counters 
of  the  treasury  over  a  matter  of  contract  like  the 
sinking  fund  appropriation. 

It  seems,  then,  from  our  last  experience,  that, 
however  solemnly  a  sovereign  state  may  confer  upon 
the  principal  of  the  public  debt  the  first  lien  upon  the 
revenues,  considerations  of  practical  policy  will  lead 
that  state  to  relegate  the  principal  of  the  debt  to  the 
frontier  of  public  obligation,  there  to  be  abandoned, 
should  the  national  income  for  a  time  retreat  within 
narrower  bounds. 


III. 

THE  THEORY  OF  AMORTIZATION. 

We  are  in  a  position,  now  that  our  historical  sur 
vey  has  supplied  us  with  a  sufficient  stock  of  prece 
dents,  to  enter  upon  the  theory  of  amortization,  and 
to  discover  the  relation  of  the  various  species  of 
sinking  fund  to  each  other,  and  to  their  common 
function.  Simple  as  the  thing  may  seem  after  our 
comparative  study,  no  financial  task  has  so  befooled 
statesmen  and  led  to  costly  mistakes,  as  the  sinking 
of  public  debt.  In  England,  the  pioneer  in  modern 
finance,  the  search  for  the  best  way  of  amortization 
has  strained  the  powers,  and  taxed  the  ingenuity,  of 
the  best  heads  for  over  a  century.  And  yet  it  has 
been  demonstrated  that  England,  during  the  Napo 
leonic  wars,  lost  by  her  theory  of  amortization  a  sum 
greater  than  the  debt  left  us  by  the  Revolution.  In 
fact,  it  is  only  within  the  last  two  decades  that  the 
practice  of  the  great  financial  powers  has  approached 
such  an  unanimity,  as  encourages  the  student  fear 
lessly  to  frame  a  theory  of  amortization. 

Our  Theory  Concerned  with  Settled  Policy. 
The  first  thing  to  note  is,  that  whatever  theory 
there  may  be  relates  to  the  sinking  of  funded, 
consolidated,  or  permanent  debt.  The  theoretical 
side  of  amortization  is  principally  concerned  with 
fixed  policy;  and  floating  debt,  such  as  treasury  notes, 
exchequer  bills,  bons  du  tresor,  is  not,  and  should  not 
become  the  object  of  a  permanent  provision.  Good 
financiering  requires  that  a  floating  debt  be  either 
paid  off  or  funded.  We  have,  it  is  true,  occasional 
redemption  funds  and  the  rather  nondescript  caisse 


397]  Sinking  Funds.  87 

d' amortissement  of  Napoleon  I,  but  their  theoretical 
import  is  too  slight  to  require  treatment. 

Similarly  we  are  not  concerned  with  any  temporary, 
hand-to-mouth  handling  of  a  time  debt.  When  leg 
islation  busies  itself  solely  with  the  present,  leaving 
policy  free  to  be  continually  adjusted  to  circum 
stances,  hindsight  replaces  foresight.  It  is  in  the 
remote  consequences  of  a  settled  fiscal  policy  that 
the  perplexing  problems  of  the  financier  lie. 

The  Meaning  of  the  term  "Sinking  Fund." 

Our  theory  has  to  do  with  sinking  funds.  But  it 
is  proper  to  note  that  this  word  is  ambiguous.  The 
word  "fund"  was  formerly  used  to  designate  a  num 
ber  of  items  of  revenue  grouped  together  and  regu 
larly  devoted  to  a  specific  object.  The  "sinking 
fund"  was  that  group  of  revenues  regularly  applied 
to  the  principal  of  the  debt.  The  yearly  yield  of  this 
group  was  the  "annual  sinking  fund." 

Now  let  this  appropriation  be  conceived,  not  as 
applied  directly  to  the  debt,  but  as  invested  in  active 
securities  destined  ultimately  to  redeem  the  debt.  In 
that  case  this  accumulation  of  securities  might  be 
regarded  as,  properly  speaking,  the  sinking  fund. 
And  this,  even  if  the  securities  invested  in  be  the 
very  bonds  that  the  sinking  fund  is  destined  to  pay 
off.  By  the  hocus-pocus  of  legal  fiction,  the  still 
active  public  securities  acquired,  may  be,  and  actu 
ally  were,  regarded  as  the  sinking  fund  for  their  own 
redemption. 

It  is  plain  that,  with  the  abandonment  of  this 
system — in  this  country  in  1817,  and  in  England 
in  1829 — the  term  "sinking  fund"  would  tend  to 
revert  to  its  original  sense.  But  meanwhile,  the  old 


88  Sinking  Funds.  [398 

habit  of  devoting  certain  revenues  to  particular  uses 
had  been  broken  off.  Hence,  as  there  was  no  well- 
defined  fund  to  which  the  word  might  attach,  "sink 
ing  fund"  would  come  to  mean  the  system,  policy,  or 
enactment,  under  which  money  is  regularly  applied 
to  the  principal  of  a  debt.  And  finally  the  word 
would  frequently  be  used  to  describe  the  payment 
itself,  i.  e.,  the  payment  made  in  behalf  of  the  prin 
cipal  of  a  debt  under  a  general  law.  This  is  why  the 
appropriation  of  the  surplus  of  1790  to  the  purchase 
of  stock  did  not,  strictly  speaking,  found  a  sinking 
fund  at  all.  It  was  only  in  the  clause  permitting 
loans  that  any  hint  of  continuous  amortization 
appeared. 

It  is  to  be  kept  in  mind  that  the  discussion  turns 
on  the  mode  of  applying  money  to  the  extinguish 
ment  of  a  debt.  In  our  analysis  we  cannot  ask 
whether  the  moneys  applied  come  from  taxation,  or 
from  new  loans.  The  source  of  the  appropriation, 
though  of  the  highest  practical  importance,  cannot 
furnish  the  ground  of  classification. 

Bearing  this  in  mind,  it  is  proposed  in  the  discus 
sion  to  justify  the  following  analysis: 

f  f  I accumulating 

proportional-^ 

( simple 

f  ( certain 

Kegular  I  annuities •<  life 

appropriation  •{  I  premium  bonds 

I  nrnirroaaivA     I  Combined  flllld 


progressive 


Amortization  by  -1 

|  formal  sinking  fund 

I  specific  funds 

If  specific  income 
flv.     J  fixed  proportion 

i  sinking  fund  appropriation 
fixed  sums 

( Instalment. 


Contingent        (  of  intentional  surplus 
appropriation  •< 

(  of  casual  surplus 


399]  linking  Funds.  89 

Contingent  Amortization. 

As  the  simplest  reduction  of  a  debt  takes  place 
by  casual  appropriations,  so  the  simplest  sinking 
fund  is  the  permanent  appropriation  of  casual, 
budgetary  surpluses.  If  these  surpluses  are  really 
casual,  there  is  no  guarantee  that  they  will  more 
than  cover,  in  the  long  run,  the  casual  deficits.  But 
if  these  latter  were  to  be  covered,  not  by  casual  sur 
pluses  of  succeeding  years,  but  by  being  given  a 
place  within  the  next  budget,  it  is  possible  that  such 
a  sinking  fund  might  really  yield  something.  In 
these  days  of  close  estimates,  however,  it  can  not 
be  depended  upon  for  anything  effective. 

The  second  type  of  sinking  fund  is  the  per 
manent  appropriation  of  intentional  surpluses. 
This  species  is  well  illustrated  in  the  English  "  Old 
Sinking  Fund."  In  1828,  after  a  parliamentary 
commission  had  announced  the  bad  results  of  Pitt's 
sinking  fund,  the  reaction  against  inviolable  appro 
priations  was  so  strong  that  Parliament  went  to  the 
extreme  of  laxity  with  the  payment  of  the  debt. 
Bitter  experience  had  taught  that  a  sinking  fund 
should  be  suspended  when  the  necessary  revenue  is 
not  forthcoming.  Pressing  the  argument  further,  it 
was  concluded  that,  as  it  was  impossible  to  escape 
an  occasional  deficit  year,  the  whole  system  of  regu 
lar  amortization  ought  to  be  discarded.  Parliament 
could  escape  all  the  dangers  and  secure  all  the 
benefits  of  a  sinking  fund  simply  by  devoting  any 
net  surplus  that  might  arise  to  the  extinguishment 
of  the  debt.  This  was  done,  and  Parliament  con 
tented  itself  with  recommending  that,  in  making  up 
the  budget,  the  Chancellor  of  the  Exchequer  plan 
for  a  surplus  of  at  least  three  millions.  As  a  result 


90  Sinking  Funds.  [400 

of  thus  vacating  responsibility,  the  surplus  soon 
dwindled  to  as  many  hundred  thousand,  and  the 
policy  of  debt  extinction  languished.  Ministers  of 
finance  preached  to  willing  ears  the  doctrine  that 
it  is  better  to  "let  money  fructify  in  the  pockets  of 
the  people,"  than  to  tax  it  out  and  thereby  stop  the 
interest  on  consols. 

At  the  same  time,  the  monied  classes — who  with 
clearer  vision  saw  that  taxation  is,  in  fact,  largely 
compulsory  capitalization — strenuously  opposed  any 
rapid  debt  payment  that  would  lessen  their  dividends 
by  diluting  the  fund  of  national  capital  with  a  stream 
of  state-collected  earnings.  As  a  result,  one  min 
ister  after  another  preferred  to  remit  taxes,  rather 
than  incur  the  displeasure  of  the  people  and  the 
hostility  of  the  creditor  interests.  Between  1829  and 
1869,  the  clear  surplus  applied  to  the  British  debt 
averaged— not  £3,000,000,  but  £760,000. 

Experience,  hence,  seems  to  show  that  any  scheme 
of  amortization,  not  backed  by  the  utmost  sanction 
of  legislative  enactment  and  the  firmest  pledging  of 
national  honor,  is  liable  to  quick  collapse.  To  ap- 
priate  to  the  national  debt  all  the  annual  surpluses, 
and  then  to  charge  the  ministry  to  see  to  it  that  there 
be  a  surplus,  is  to  shift  great  responsibility  to  weak 
shoulders.  To  leave  the  matter  of  a  surplus  to  the 
decision  of  a  ministry  is  to  put  the  policy  of  paying 
a  debt  at  the  most  exposed  point  in  goverment,  subject 
to  the  continual  and  combined  assaults  of  special  in 
terests  and  party  clamor  for  the  remission  of  taxes. 
Rarely,  indeed,  will  the  policy  of  high  taxes,  to  pay 
a  debt,  be  steadily  supported  by  public  opinion,  at 
every  moment  and  on  every  occasion.  At  the  close 
of  the  Civil  war,  we  declared  we  would  pay  off  our 


401]  Sinking  Funds.  91 

debt  within  a  generation.  It  is  true  fulfillment  has 
not  lagged  far  behind  promise,  but  it  is  doubtful 
whether  our  policy  of  rapid  amortization  would  have 
been  persevered  in  so  well,  if  our  debt  had  been  paid 
with  taxes  as  such.  It  is  perhaps,  the  pleasing  con 
sciousness  that  our  magical  protective  tariff  has 
enabled  us  to  saddle  our  debt  on  the  foreign  manu 
facturer,  that  has  held  us  to  the  payment  of  nearly 
two  billions. 

Uniform  Amortization. 

The  next  type  is  the  fixed  sinking  fund,  by  which 
the  payment  of  debt  is  made  the  object  of  intra- 
budgetary  provision.  The  difference  between  this 
type  and  the  former  is  that,  while  the  former  is 
indirectly  suspensible,  the  latter  can  be  suspended 
only  by  positive  enactment.  The  former  sinking 
fund  is  practically  suspended  by  any  remission  of 
taxes,  or  by  extra  heavy  appropriations  for  other 
purposes.  On  the  other  hand,  when  the  appropria 
tion  is  regular  and  not  contingent,  it  can  be  sus 
pended  only  by  overt  act  of  the  legislature,  requir 
ing  with  us  the  concurrence  of  the  three  legislative 
branches.  This  genus  of  sinking  funds,  then,  has 
certain  self-conserving  properties  that  fit  it  for  the 
nation  that  is  in  earnest  in  its  amortization. 

At  the  same  time,  it  should  be  borne  in  mind  that 
the  regular  appropriation  introduced  into  the  budget 
is  of  a  peculiar  nature.  It  is  not  to  be  ranked  with 
other  items  of  expense,  so  as  to  claim  an  equal  right 
with  them  to  be  satisfied  out  of  a  temporary  loan,  in 
case  of  a  deficit.  For  the  sinking  fund  is  peculiar 
in  that  it  has  a  function  that  is  annulled,  in  so  far  as 
money  is  borrowed  for  it.  The  function,  for  instance, 


92  Sinking  Funds.  [402 

of  a  government  gun  foundry  is  the  making  of  guns. 
If  money  is  borrowed  for  it,  it  still  functionates — 
the  guns  are  made.  The  function  of  a  sinking  fund 
is  to  lessen  debt.  If  money  is  borrowed  for  it,  it 
does  not  really  discharge  its  function — the  debt  is 
not  lessened.  When  the  debt  made  and  the  debt 
paid  are  equal  the  net  performance  of  the  sinking 
fund  is  zero.  This  explains  why  a  sinking  fund 
is  not  always  to  be  placed  on  the  same  footing 
with  other  appropriations. 

Effect  of  Amortization  in  a  Borrowing  Period. 

One  of  the  most  striking  things  in  the  history  of 
sinking  funds  is  the  willingness  of  financiers  to 
borrow  with  one  hand,  while  paying  unmatured  debt 
with  the  other.  No  matter  how  great  the  volume  of 
government  paper  that  chokes  the  stock  market,  the 
finance  minister  is  always  eager  to  maintain  circula 
tion  in  the  stagnant  mass  by  feeding  in  new  stock  at 
one  price,  and  buying  out  old  stock  at  a  higher  price. 
He  justifies  this  seemingly  reckless  policy  on  the 
ground  that  it  inspires  confidence,  in  both  the  money 
lender  and  the  public.  This  results,  he  insists,  in  a 
higher  price  of  stock,  and  so  the  government  reaps  a 
kind  of  psychological  premium  on  the  excess  of 
stock  sold  over  stock  bought. 

To  the  logician  this  is  a  hard  saying.  If  the  gov 
ernment  buys  bonds  for  its  sinking  fund  during  a 
loan  period,  just  so  much  the  more  has  it  to  borrow. 
The  supply  of  and  the  demand  for  capital  are  equally 
increased.  How,  then,  can  the  price  be  affected  ? 
Or,  shall  we  admit  that  the  extra  and  just-balancing 
supply  and  demand,  occasioned  by  keeping  the  sink 
ing  fund  active,  react  upon  and  modify  the  former 


403]  Sinking  Funds.  93 

supply  of  and  demand  for  capital  ?  It  may  be  that 
stocks  have  not  that  automatic,  unerring  sagacity 
ascribed  to  them.  Both  money-lender  and  taxpayer 
are  men,  and  can  be  deceived  by  painted  canvas. 
May  it  not  be  that  the  financier  has  yet  something 
to  teach  us  about  the  theatrical  element  in  practical 
finance  ? 

England  has  touched  the  opposite  extreme  of  opin 
ion  on  this  point.  Formerly  her  statesmen  argued 
that  a  sinking  fund,  kept  up  even  during  a  borrow 
ing  period,  appreciated  stocks  by  creating  a  steady 
artificial  demand  for  them.  The  parliamentary  com 
mittee  of  1828,  on  the  other  hand,  thought  that  such 
a  policy  depreciates  stocks  by  necessitating  just  so 
much  larger  a  loan  than  would  otherwise  be  called 
for.  This  criticism  errs  as  much  in  one  direction, 
as  the  old  theory  did  in  the  other.  Perhaps  it  errs 
even  more.  It  is  hard  to  see  how  the  selling  and 
buying  of  equal  amounts  of  similar  stock,  in  the 
same  market,  at  about  the  same  time,  can  alter  the 
price  one  way  or  the  other.  But  if  psychological 
causes  do  alter  it,  the  change  will  assuredly  not  be 
in  the  direction  of  depreciation. 

When  Suspension  Is  Not  Necessary. 

Adopting  the  general  rule,  that  a  government 
should  not  continue  paying  debt  at  a  time  when 
deficits  compel  a  resort  to  loans,  it  remains  to  inquire 
what  exceptions,  if  any,  should  be  made.  There 
seem  to  be  two  cases  in  which  a  sinking  fund  need 
not  be  suspended  : 

1.  When  amortization  presents  itself  as  a  kind  of 
partial  refunding. 


94  Sinking  Funds.,  [404 

2.  When  the  moral  loss  from  any  deviation  from  a 
settled  financial  policy  would  exceed  the  pecuniary 
cost  of  adhering  to  that  policy. 

This  is  simply  saying  that  finance  is  politics,  as 
well  as  science.  But  it  is  well  to  note  here  that  the 
concessions  science  needs  make  to  politics,  depend 
much,  in  any  concrete  case,  upon  the  kind  of  finan 
cial  doctrine  that  statesmen  have  been  preaching 
to  the  public  and  to  its  creditors.  It  was  the 
unsound  doctrine,  instilled  by  Pitt  into  the  minds  of 
Englishmen  in  1786,  that  made  it  bad  politics  to  sus 
pend  the  sinking  fund  in  1793  and  thereafter. 

Forms  of  Uniform  Amortization. 

The  fixed  appropriation  sinking  fund  may  be  real 
ized  in  three  distinct  forms.  There  may  be  periodi 
cally  applied  to  the  principal  of  the  debt  a  fixed  sum,  a 
fixed  proportion  of  the  nominal  capital  of  the  debt, 
or  the  income  from  a  specified  scource. 

The  fixed  sum,  moreover,  may  be  applied  under 
the  original  terms  of  contract  with  creditors,  or 
under  subsequent  enactment.  In  the  first  case,  we 
have  a  debt  made  payable  in  instalments.  This  is 
one  of  the  most  objectionable  methods  of  extinguish 
ing  a  debt,  seeing  that,  in  case  of  an  emergency,  it 
forces  upon  the  government  the  costly  alternative 
of  paying  old  debts  with  the  proceeds  of  dear  loans 
on  the  one  hand,  or  of  violating  the  public  faith  on 
the  other.  In  the  second  case,  we  have  the  ordi 
nary,  old-fashioned  redemption  appropriation.  As  it 
is  established  subsequent  to  the  contracting  of  the 
debt  it  redeems,  the  government  is  free,  if  it  has  not 
needlessly  tied  its  own  hands,  to  suspend  the  pay 
ment,  whenever  the  public  interest  requires  it. 


405]  Sinking  Funds.  95 

The  second  form  of  fixed  regular  appropriation — 
the  setting  aside  of  a  definite  proportion,  instead  of 
a  definite  sum — is  adopted  when  the  total  debt 
comprehended  in  the  scheme  of  amortization  is,  as 
yet,  uncertain.  Once  this  is  ascertained,  the  pay 
ment  becomes  definite,  and  operates  uniformly  on 
the  debt  till  its  extinction.  This  was  the  form  of 
sinking  fund  maintained  in  Russia  until  1860.  Cer 
tain  loans  were  to  be  amortized  by  annual  payments 
of  one,  two,  or  two  and  one-half  per  cent,  that  is,  in 
one  hundred,  fifty,  or  forty  years. 

The  third  form — the  setting  apart  for  the  principal 
of  the  debt  of  all  income  from  certain  specified 
sources — is  characteristic  of  new  countries  in  the 
earlier  stages  of  financiering,  or  of  nations  threatened 
with  disaster  to  public  credit.  Formerly  it  was 
maintained  in  France  and  England,  and  we  have 
seen  how,  step  by  step,  the  United  States  was  forced 
into  the  same  policy.  It  is  still  maintained  in  such 
countries  as  Austria,  Hungary,  Roumania,  and 
Servia.  It  is  a  survival  of  the  time  when  general 
national  credit  was  unknown,  and  loans  were  raised 
by  pledging  specific  funds  to  pay  interest  and  prin 
cipal.  As  the  specific  revenue  sinking  fund  is  char 
acteristic  of  an  inferior  national  credit  and  an  unde 
veloped  fiscal  system,  it  is  often  incorporated  into 
the  act  authorizing  a  loan,  with  a  view  to  inspiring 
confidence  in  lenders.  When  thus  established  the 
sinking  fund  is  inviolable,  seeing  that  the  specified 
revenues  are  not  only  appropriated,  but  even  mort 
gaged  beforehand,  to  the  redemption  of  the  debt. 
Moreover,  as  the  interest  of  a  loan  should  rest  upon  as 
sound  a  guarantee  as  does  the  principal,  it  is  usual  to 
pledge  specific  revenues  to  the  general  debt  service, 


96  Sinking  Funds.  [400 

both  for  interest  and  for  principal.  In  this  case,  as 
we  shall  see,  amortization  becomes  progressive. 

The  merits  of  the  general  type  of  sinking  fund  we 
have  just  been  considering,  over  the  contingent  appro 
priation  are,  that  it  is  really  efficient,  and  that  it 
may  not  be  suspended  without  special  action.  But, 
nevertheless,  the  fixed  sinking  fund  has  a  grave 
defect.  The  appropriation,  as  we  have  seen,  is  defi 
nite  and  constant.  But  as  its  action  periodically 
extinguishes  some  part  of  the  debt,  and  thus  stops 
the  interest  thereon,  it  follows  that  the  general  inter 
est  charges  must  decline.  The  debt  service,  hence, 
becomes  a  troublesome  variable  in  the  budget,  that 
calls  for  a  perpetual  tinkering  of  the  revenue  system 
and  a  continual  re-adjustment  of  receipts  to  expendi 
tures. 

Besides  this  practical  inconvenience,  the  fixed 
sinking  fund  puts  the  heaviest  burden  just  at  the 
beginning  of  amortization.  So  against  this  policy  it 
might  be  urged  :— 

1.  That  the  simplest  justice  demands  that  a  public 
debt  bear  uniformly  over  a  term  of  years. 

2.  That,  as  growth  in  population  and  wealth  in 
creases  the  financial  power,  a  progressive  debt  charge 
would  come  nearer   to  securing  a  just  equality  of 
burden  than  a  diminishing  debt  charge. 

Progressive  Amortization. 

Now  both  these  defects  are,  in  a  measure,  remedied 
by  converting  the  fixed  sinking  fund  into  a  progres 
sive  sinking  fund.  The  characteristic  of  this  type  is, 
that  the  total  debt  charge  is  kept  constant,  by  causing 
each  annual  payment  to  take  up  the  slack  that 


407]  Sinking  Funds.  97 

previous  amortization  has  left  in  the  interest  charge. 
Each  payment  is  made  up  of: 

1.  The  original  fixed  payment. 

2.  The  total  annual  interest  released. 

The  progress,  then,  is  not  arbitrary,  but  perfectly 
systematic.  It  is  not  as  if  the  government  had 
decided  to  amortize  $20,000,000  the  first  year, 
$21,000,000  the  second  year,  $22,000,000  the  third 
year,  and  so  on.  The  growth  is  automatic  depending 
upon: 

a  The  amount  of  the  fixed  payment. 

b  The  rate  of  interest  of  the  debt  amortized. 

If  we  let  these  two  factors  be  represented  by  x  and 
y  respectively,  the  progress  of  the  amortization  is 
indicated  by  the  mathematical  formulae  for  an 
annuity  at  compound  interest. 

End  of  1st  year x 

"     "  2nd  year x  -f  x  (1  +  y} 

"     "  3rd  year  x  +  (a;  +  x  (1  +  y))  (1  +  y). . .  -etc. 

The  type  of  progressive  sinking  fund  assumes  four 
forms,  accordingly  as  it  is  the  surplus  of  specific 
interest  funds,  is  formal,  is  combined,  or  is  distributed 
among  annuities.  As  it  is  to  this  type  that  amortiza 
tion  tends  to  conform,  and  as  its  four  forms  are  of 
great  historical  importance,  it  will  repay  a  careful 
and  detailed  study. 

The  first  form  is  the  simplest  and  the  earliest.  We 
are  to  conceive  of  a  debt  bottomed  on  certain  specified 
revenues  yielding  something  more  than  the  interest. 
Suppose,  now,  that  any  annual  surplus  these  revenues 
may  yield  be  applied  to  the  payment  of  part  of  the 
debt.  Part  of  the  interest  will  thereby  be  stopped, 
and  the  surplus  of  the  next  year  will  be  so  much  the 
larger.  In  principle,  then,  this  surplus  sinking  fund 
7 


98  Sinking  Funds.  [408 

is  truly  progressive,  although  its  regularity  of  growth 
is  likely  to  be  obscured  by  fluctuations  in  the  annual 
revenue  from  the  specified  sources.  This  is  the  form 
of  the  first  English  sinking  fund — that  of  1716. 

The  formally  progressive  sinking  fund,  invented 
by  Pitt  and  imitated  by  Hamilton,  requires  the 
creation  of  a  special  branch  of  administration,  say  a 
board  of  commissioners.  To  this  board  the  treasury 
pays  the  annual  sinking  fund  appropriation,  which  is 
straightway  used  to  buy  up,  or  redeem,  government 
stock.  Practically  the  stock  thus  acquired  represents 
extinguished  debt,  and  might  properly  be  cancelled 
and  destroyed.  But  it  is  not  so  regarded.  The  legal 
fiction  is  set  up  that  the  board  is  a  creditor  of  the 
government,  and  that  the  stocks  it  holds  are  active 
obligations  on  which  interest  should  still  be  paid. 
Accordingly  the  treasury  pays  over  the  accruing 
interest  to  the  board,  as  it  would  to  any  large  holder 
of  government  securities.  No  matter,  therefore,  how 
much  debt  has  been  amortized  by  the  government, 
the  nominal  debt  and  the  nominal  interest  charge 
remain  the  same.  Until  the  last  dollar  is  paid,  and 
the  board  formally  surrenders  the  stock  to  the 
treasury  as  defunct  paper,  the  public  debt  is  regarded 
as  undiminished.  The  treasury  pays  every  year,  or 
every  quarter,  interest  on  stock  wherever  held,  and 
also  a  fixed  sum  to  the  board.  The  board  receives 
this  sum  together  with  the  interest  that  comes  to  it 
as  a  holder  of  stock.  These  two  items,  then,  make 
up  the  force  of  the  sinking  fund  for  that  year,  or  that 
quarter.  This  total  is  invested  in  more  stock.  The 
next  sinking  fund  payment  is  made  up,  not  only  of 
the  two  former  items,  but  also  of  interest  on  the 
additional  stock  representing  the  previous  investment. 


409]  Sinking  Funds.  99 

Precisely  the  same  results  are  reached  in  a  much 
simpler  way,  by  the  second  form  of  progressive  sink 
ing  fund.  I  call  it  "combined,"  because  the  appro 
priation  for  the  principal  of  the  debt  is  not  distin 
guished  from  that  for  the  interest,  but  is  combined 
with  it  under  the  head  of  "debt  service,"  or  under 
the  misleading  title  of  "-sinking  fund."  By  this 
method  a  fixed  sum,  larger  than  the  interest  charge 
alone,  is  applied  annually  to  the  debt,  being  divided 
between  interest  and  principal.  If  we  think  of  this 
sum  as  a  line  of  a  given  length,  the  point  of  division 
between  the  two  uses  will  each  year  be  nearer  the 
interest  end  than  the  year  before.  Though  such  a 
sinking  fund  may  be  managed  by  a  special  board, 
there  exists  no  logical  necessity  for  it  as  there  does 
in  the  preceding  case.  This  form  of  amortization 
seems  to  have  been  introduced  by  Gallatin  in  1802. 

From  the  combined  sinking  fund  we  easily  reach  that 
form  hidden-away  in  terminable  annuities.  Instead 
of  applying  in  lump  to  the  debt  till  its  extinction  an 
annual  fixed  payment  somewhat  larger  than  the 
interest  charge,  suppose  this  payment  subdivided, 
and  applied  equally  to  every  minute  portion  of  the 
debt  operated  on.  Instead  of  barely  paying  the 
interest  on  one  part  of  the  debt  and  buying  the  rest 
outright,  suppose  we  spread  the  combined  fund 
evenly  over  the  whole  mass.  We  have  then  changed 
our  terminable  annual  debt  fund  into  a  great  many 
terminable  annuities.  In  operation  these  are  identi 
cal.  A  given  annual  appropriation  will  discharge  a 
debt  as  soon  one  way,  as  the  other.  Is  there,  then, 
any  practical  difference?  In  fact,  the  practical  dif 
ference  is  great,  and  it  is  just  the  oft-recurring 
difference  between  a  policy  under  the  control  of  gov- 


100  Sinking  Funds.  [410 

ernment,  and  one  not  under  its  control.  The  ordinary 
combined  sinking  fund,  if  established  subsequent  to 
the  debt  it  operates  upon,  is  really  a  contract  with  no 
one,  and  can  be  suspended  at  need.  Even  if  such  a 
sinking  fund  is  so  incorporated  into  the  loan  bill,  as 
to  be  part  of  the  contract  with  the  creditors,  it  is 
still  under  the  control  of  government.  The  govern 
ment  has  promised  to  amortize  some  part  of  the  debt 
every  year,  but  has  not  engaged  to  take  up  any 
particular  bond  or  bonds.  The  contract  is  general 
in  its  nature  and  may  be  made  to  include  future 
creditors. 

But  by  throwing  its  annual  payment  into  the  form 
of  terminable  annuities,  the  government  enters  into 
a  positive  and  specific  engagement  with  the  individual 
creditor.  In  the  annuity  the  instalment  on  the  prin 
cipal  is  so  bound  up  with  the  payment  of  the  regular 
interest  that  a  failure  to  pay  the  one  is  as  serious  as 
a  failure  to  pay  the  other,  and  equally  with  it  involves 
a  confession  of  bankruptcy.  A  sinking  fund  in  ter 
minable  annuities,  then,  is  the  most  automatic  and 
cast-iron  of  all  modes  of  amortization.  The  loss  it 
may  entail  was  shown  in  the  war  of  1812,  when  the 
government  borrowed  money  on  stock  at  65  or  70,  in 
order  to  pay  off  the  eight  per  cent,  annuities  into 
which  Hamilton  had  converted  the  six  per  cent, 
stock.  Distinct  as  it  is,  the  automatic  nature  of  the 
annuity  sinking  fund  has  not  been  generally  recog 
nized.  Parliament  in  1822,  while  utterly  rejecting 
the  principle  of  borrowing  in  order  to  pay  debt,  took 
occasion  to  reaffirm  its  confidence  in  the  wisdom  of 
terminable  annuities. 

Of  like  nature  with  terminable  annuities,  though  so 
covert  that  it  has  apparently  never  been  recognized, 


411]  Sinking  Funds.  101 

is  the  sinking  fund  concealed  in  the  interest  paid  on 
premium  bonds.  For,  in  truth,  the  difference  is  but 
this.  The  terminable  annuity  includes,  besides  the 
pure  interest,  a  surplus  sufficient  in  a  term  of  years 
to  pay  back  all  that  the  government  has  borrowed. 
The  yearly  payment  on  the  premium  bond  includes, 
besides  the  pure  interest,  a  surplus  sufficient  in  a 
term  of  years  to  pay  back  some  part  of  what  the  gov 
ernment  has  borrowed.  If  a  $100  bond  be  sold  for 
$102,  as  it  was  in  the  loan  of  1848,  there  are  two 
dollars  that  the  government  does  not  pay  back  when 
the  bond  is  due.  Is  this  premium,  then,  never  paid 
back  at  all?  Assuredly.  To  sell  the  bond  at  a  pre 
mium  the  government  had  to  offer  a  rate  of  interest 
higher  than  normal,  and  this  narrow  yearly  margin 
is  the  progressive  sinking  fund  that  during  the  term 
of  the  bond  gradually  pays  the  two  dollars  unac 
counted  for. 

Proportional  Amortization. 

Leaving  the  progressive  sinking  fund  we  pass  to 
the  final  type  —  the  proportional  sinking  fund.  In 
this  type  the  yearly  appropriation  is  a  certain  fixed 
percentage  of  the  outstanding  debt,  whatever  it  may 
be.  In  the  simple  form  of  the  proportional  sinking 
fund,  this  would  mean  diminishing  or  regressive 
amortization  —  a  policy  without  reason  and  without 
precedent.  In  the  other  form,  exemplified  in  the 
sinking  fund  of  February  25,  1862,  the  annual  pay 
ment  is  increased  by  the  interest  on  all  bonds  pur 
chased.  Hence,  just  as  the  progressive  sinking  fund 
is  composed  of  two  elements  —  the  fixed  annual  pay 
ment  and  the  released  interest  —  so  the  proportional 
sinking  fund  of  1862  has  been  composed  of  two  ele- 


102  Sinking  Funds.  [412 

ments  —  the  decreasing  payment  of  one  per  cent,  of 
all  outstanding  debt,  and  the  released  interest. 

In  the  latter,  one  component  diminishes  while  the 
other  increases,  and  the  question  as  to  whether  the 
regress  of  the  one  will  prevail  over  the  progress  of 
the  other,  is  decided  by  ascertaining  the  ratio  of  the 
rate  of  proportional  payment  to  the  rate  of  interest 
on  the  debt.  This  type  of  sinking  fund,  then,  may 
be  either  regressive,  progressive,  or  fixed.  Indeed 
we  can  even  imagine  such  a  fund  as,  at  first  pro 
gressing,  and  then  declining  when  successive  refund- 
ings  at  lower  rates  of  interest  have  checked  the 
growth  of  the  interest  component.  To  this  class 
belong  the  sinking  funds  of  Belgium  and  the  United 
States. 

Variations  from  the   Type. 

After  this  survey  of  the  various  distinct  species  of 
sinking  fund  it  remains  to  add  that,  in  practice,  two 
or  more  species  are  often  united.  Thus  the  yearly 
supply  of  the  progressive  sinking  fund,  besides  the 
released  interest,  is  sometimes  a  n'xed  sum,  some 
times  a  certain  group  of  revenues,  sometimes  both 
together.  The  budgetary  surplus  usually  goes  to 
the  debt,  either  as  a  separate  sinking  fund,  or  as  an 
eventual  resource  of  the  main  fund.  It  has  been  no 
uncommon  thing  for  a  nation  to  have  at  the  same  time 
a  whole  group  of  sinking  funds  operating  each  on  its 
own  portion  of  the  debt.  This  naturally  results  from 
the  policy  of  creating  a  special  sinking  fund  with 
each  loan.  Sometimes  these  sinking  funds  are  of 
different  kinds  and  represent  antagonistic  financial 
principles.  Thus  England,  besides  her  five  small 
special  sinking  funds,  has  the  "Old  Sinking  Fund," 


413]  Sinking  Funds.  103 

the  "New  Sinking  Fund,"  and  the  terminable  annu 
ities.  The  first  marks  the  farthest  recoil  from  the 
system  of  inviolable  payment,  while  the  third  is  the 
most  rigid  kind  of  amortization. 


Tendency  to  uniform  treatment  of  a  public  debt. 

It  is  probable  that,  with  certain  exceptions  to  be 
noted  later,  all  specialization,  either  of  revenue,  or 
of  debt,  is  bound  to  disappear.  If  the  treatment  of 
public  debt  exhibits  any  pronounced  change,  it  is  in 
the  direction  of  unity  of  administration.  Formerly 
the  national  revenues  were  parcelled  and  assigned  to 
particular  uses.  Now  they  are  usually  treated  as  an 
indiscriminate  whole.  Formerly  the  national  debt 
existed  in  the  form  of  various  loans,  each  having  its 
own  interest  fund  and  its  own  sinking  fund.  Now 
the  debt  is  consolidated,  based  on  the  general  credit 
and  subjected  throughout  to  the  same  policy  of  amor 
tization.  The  tendency,  hence,  is  toward  unity  and 
simplicity. 

Suspension  of  Amortization. 

A  further  point  is  to  be  noted  in  reference  to  in 
violability.  We  have  laid  down  the  general  rule 
that  a  sinking  fund  should  be  suspended  in  a  time 
of  borrowing.  Indeed  we  can  say  that  it  should  be 
suspended  as  soon  as  the  need  of  a  future  resort  to 
loans  is  first  felt.  This  is  not  to  say,  however,  that 
cash  for  amortization  is  to  be  left  to  lie  idle  in  the 
treasury  in  anticipation  of  a  remote  deficit.  There  is 
always  some  point,  at  which  the  gain  by  stopping 
current  interest  will  outweigh  the  ultimate  loss  by 
procuring  money  with  new  bonds. 


104  Sinking  Funds.  [414 

Now  it  is  possible  to  suspend  a  regular  sinking 
fund,  in  whole  or  in  part,  indirectly,  without  the 
formality  and  publicity  of  a  legislative  enactment. 
Thus,  into  the  act  establishing  Pitt's  sinking  fund 
Fox  introduced  a  clause  permitting  the  commission 
to  use  their  funds  in  buying  new  stock  directly  of 
the  government,  instead  of  buying  on  the  market. 
Part  of  the  French  sinking  fund  of  1833  could  be 
expended,  only  when  five  per  cents  were  below  par. 
As  this  never  happened,  the  government  was  able  to 
borrow  this  part  from  the  sinking  fund  by  giving 
certificates  in  acknowledgment.  The  Walpole  sink 
ing  fund  was  practically  confiscated  by  being 
charged  with  the  interest  on  new  loans.  Gallatin's 
sinking  fund  was  quickly  tied  up,  in  1812-15,  by 
being  charged  with  the  payment  of  short  loans  in 
the  form  of  treasury  notes.  By  these  methods,  the 
simplest  sinking  fund  may  be  practically  suspended 
without  direct  enactment. 

What  is  the  Best  Mode  of  Amortization  ? 
In  selecting  a  mode  of  amortization,  the  financier 
should  ask  himself  whether  it  is  desirable  that  the 
debt  should  weigh  most  heavily  during  the  early 
years  of  sinking,  or  should  bear  evenly  over  the 
whole  period.  If,  as  is  likely,  the  latter  is  preferable, 
then  he  should  choose  some  form  of  the  progressive 
sinking  fund.  Of  the  four  species,  the  specific  reve 
nue  debt  fund  seems  the  most  appropriate,  when  a 
loan  has  been  incurred  on  behalf  of  a  productive 
enterprise.  When  money  has  been  borrowed  for  the 
building  of  railways,  or  the  purchase  of  telegraphs, 
there  seems  to  be  a  peculiar  propriety  in  setting 
aside  the  earnings  for  payment  of  interest  and  reim- 


415]  Sinking  Funds.  105 

bursement  of  the  principal.  By  this  kind  of  lim 
ited  liability,  that  requires  that  each  business  that 
comes  into  the  hands  of  the  government  should  pay 
for  itself,  the  people  are  secured  against  certain 
odious  forms  of  patronage  and  favoritism.  But 
apart  from  productive  loans,  the  appropriation  of 
specific  revenues  for  a  debt  is  clumsy  and  antiquated. 

The  second  species  —  the  formally  progressive  sink 
ing  fund  —  has  been  the  subject  of  frenetic  diatribe 
by  second-rate  writers  for  half  a  century.  It  has 
been  stigmatized  as  the  "  compound-interest  sinking 
fund,"  as  if  every  species  of  progressive  amortiza 
tion  did  not  involve  growth  at  compound  interest. 
As  formerly  it  aroused  baseless  hopes,  so  later  it 
aroused  baseless  fears.  Of  it  Gibbon  says  :  "  Every 
dollar  in  its  keeping  yields  less  interest  than  in  pri 
vate  bonds  .  .  ."  In  fact,  the  sinking  fund  has 
no  dollars  in  its  keeping.  He  goes  on :  "  On  the 
theory  of  its  advocates,  the  first  step  required  to  give 
it  efficacy  is  to  increase  the  taxation  to  something 
more  than  the  interest  on  the  debt,  and  this  is  to  be 
carried  on  from  year  to  year,  and,  with  every  other 
addition,  invested  in  some  productive  securities.  It  is 
not  to  be  presumed  that  any  other  securities  than 
those  of  the  government  would  be  selected  for  such 
treatment,  and  these  must  be  purchased  at  the  mar 
ket  rate.  The  farce  is  too  transparent  to  need 
further  exposure.  It  resolves  itself  into  borrowing 
money  to  pay  borrowed  money,  and  increasing  the 
debt  by  the  amount  of  expenses  incurred  for  the 
transaction  of  the  business."1 

The  way  in  which  this  passage  associates  the 
formally  progressive  sinking  fund  with  borrowing 

Gibbon,  "United  States  Debt.",  pp.  119-121. 


106  Sinking  Funds.  [416 

shows  a  complete  misapprehension  of  its  nature.  In 
truth  the  Pitt-Hamilton  sinking  fund  is  simply  a 
complicated  and  round-about  way  of  amortizing  with 
a  constant  debt  charge.  Though  no  more  inviolable 
than  other  sinking  funds,  it  is  more  liable  to  confuse 
the  popular  mind,  partly  by  its  want  of  simplicity 
and  clearness,  partly  by  introducing  the  fiction  that 
government  paper  is  productive  property.  Because  it 
has  peculiar  dangers  and  no  peculiar  merits,  it  has 
been  generally  discarded. 

Terminable  annuities,  as  we  have  seen,  involve 
obligatory  amortization.  It  would,  therefore,  be 
folly  to  provide  by  means  of  them  for  the  amortiza 
tion  of  an  entire  national  debt.  In  conclusion,  then, 
we  are  forced  to  recognize  in  the  combined  sinking 
fund  of  Gallatin  the  best  method  of  amortization  yet 
discovered.  The  example  of  England  and  other 
nations  enforces  the  conclusion  of  our  theoretical 
discussion,  that  finds  in  this  American  contribution 
to  practical  finance  the  simplest,  clearest,  and  most 
effective  mode  of  reducing  public  debts  that  has  so 
far  been  employed. 


I   MVKIJSITY    <ir   CAI.IKOHNIA    Llllli  U!Y 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


WWt  lt>  ISI4 

1.  1916 
MAR  7  1918 


APR  5  1123 

DEC  30  1924 


APR   181f?7 


NOV   7  1928 


WJ8Q52 

.R7 
99730 


